The European Central Bank on Thursday cut interest rates by 25 basis points and updated the language in its decision to say monetary policy was becoming “meaningfully less restrictive.”
The cut brings the ECB’s deposit facility rate, its key rate, to 2.5% — a move that markets had widely priced in before the announcement.
“Monetary policy is becoming meaningfully less restrictive, as the interest rate cuts are making new borrowing less expensive for firms and households and loan growth is picking up,” the central bank said in a statement Thursday.
This marked a change from the ECB’s January comments, when the central bank had still characterized its monetary policy stance as restrictive.
Paul Donovan, chief economist at UBS Global Wealth Management, questioned whether the ECB’s latest language shift signaled anything to markets about the potential trajectory for interest rates ahead.
“Frankly it’s the case that they would say that, wouldn’t they? They’ve been cutting rates for some time now, and they have started, slowly, to reduce the real inflation-adjusted interest rate,” he told CNBC’s Julianna Tatelbaum.
“If they were going to say, no, monetary policy is still restrictive in spite of everything we’ve done, they’d look rather foolish… it’s an expression of the fact that they are doing what they said they were going to do,” he said.
The central bank’s six rate cuts over the past nine months have come amid lackluster economic growth in the region, and as the specter of tariffs on EU imports to the U.S. looms large.
Euro zone headline inflation remains below the 3% mark, despite picking up in the last few months of 2024.
Data published earlier this week showed that inflation in the region eased to 2.4% in February, down from January’s reading but coming in slightly higher than expected. So-called core inflation — which strips out food, energy, alcohol and tobacco costs — as well as services inflation also dipped after proving sticky for several months.
The ECB on Thursday reiterated that the disinflation process was “well on track,” but noted that domestic inflation remained “high.”
“Most measures of underlying inflation suggest that inflation will settle at around the Governing Council’s 2% medium-term target on a sustained basis,” it added.
Economic outlook adjustments
The central bank also released its latest economic projections Thursday.
“Staff now see headline inflation averaging 2.3% in 2025, 1.9% in 2026 and 2.0% in 2027. The upward revision in headline inflation for 2025 reflects stronger energy price dynamics,” the bank said.
In December the central bank had still been expecting inflation to average 2.1% in 2025.
The euro area’s seasonally adjusted gross domestic product, meanwhile, eked out a 0.1% increase in the fourth quarter, the latest reading from statistics agency Eurostat showed.
ECB staff projections on Thursday revised the outlook for the region’s economic growth lower, citing “continued challenges.” It is now expecting 0.9% growth in 2025, 1.2% for 2026 and 1.3% for 2027.
Previous projections had pencilled in 1.1% growth this year.
“The downward revisions for 2025 and 2026 reflect lower exports and ongoing weakness in investment, in part originating from high trade policy uncertainty as well as broader policy uncertainty,” the central bank said Thursday.
Tariff uncertainty
The Thursday rate decision comes as U.S. President Donald Trump pursues an aggressive global tariff policy and European leaders look to increase defense spending.
Tariffs on goods imported to the U.S. from Europe have not yet been announced, but have been repeatedly threatened by Trump. The extent of any such duties is currently unclear, and the option for negotiation might still be on the table.
European countries are also looking to boost their defense and security budgets, as relations between the U.S. and Ukraine have soured. An increase in defense spending could affect key economic markers like inflation and growth.
Analysts told CNBC that these geopolitical developments could result in more disagreement than usual within the ECB’s Governing Council when it comes to monetary policy decision-making in the coming months.
Officials have also appeared split on where the so-called “neutral rate” — where policy is neither stimulating nor restrictive — lies and if rates may need to go below it to help entice economic expansion.
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— CNBC’s Chloe Taylor contributed to this report.
