The European Central Bank (ECB) has cut its key interest rates by 25 basis points, reducing the deposit facility rate to 2.5%, the main refinancing rate to 2.65%, and the marginal lending facility to 2.90%. The decision, which takes effect on 12 March 2025, reflects the ECB’s updated assessment of inflation trends, underlying economic conditions, and the impact of monetary policy transmission.
Inflation outlook and economic growth concerns
The ECB noted that the disinflation process is progressing as expected, with headline inflation projected to average 2.3% in 2025, 1.9% in 2026, and 2.0% in 2027. However, inflation excluding energy and food is expected to remain slightly elevated at 2.2% in 2025 before declining to 2.0% in 2026 and 1.9% in 2027.
While inflation is moving closer to the ECB’s 2% target, the eurozone economy remains sluggish. The central bank lowered its growth projections, forecasting GDP expansion of 0.9% in 2025, 1.2% in 2026, and 1.3% in 2027. Weaker exports and subdued investment, driven in part by trade policy uncertainty, were cited as key reasons for the downgrade.
Trade tensions and policy uncertainty
The ECB’s decision comes amid growing uncertainty over global trade policies, particularly the possibility of new U.S. tariffs on European goods. President Donald Trump has threatened to impose reciprocal tariffs on trading partners, including EU member states. ECB President Christine Lagarde highlighted that escalating trade tensions could weigh on eurozone growth by dampening exports and increasing economic uncertainty.
The ECB also acknowledged broader geopolitical risks, including the ongoing war in Ukraine and potential shifts in European fiscal policy as governments consider increased military spending. Rising government borrowing costs, particularly in Germany, have contributed to volatility in bond markets, adding another layer of complexity to the ECB’s policy decisions.
Future monetary policy stance
The ECB emphasized that it remains data-dependent and will assess future rate decisions on a meeting-by-meeting basis. The central bank is not committing to a specific rate path, indicating that further cuts will depend on inflation dynamics, economic data, and financial conditions.
“Monetary policy is becoming meaningfully less restrictive, as the interest rate cuts are making new borrowing less expensive for firms and households,” the ECB said. However, it also noted that past rate hikes are still transmitting through the economy, keeping overall lending activity subdued.
With inflation still above target and external risks rising, the ECB faces a balancing act between supporting growth and ensuring inflation stabilizes sustainably. Markets will now turn their attention to upcoming policy decisions from the U.S. Federal Reserve, which is expected to begin cutting rates later this year.
