ECB cuts interest rate to 2.5%

MT HANNACH
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The European Central Bank has reduced its reference interest rate by a quarter to 2.5%, as it reported a possible slowdown in borrowing costs.

The widely expected move on Thursday is the sixth reduction in ECBThe deposit rate since the central bank began its rate reduction cycle last June, when the reference was 4% record to counter inflation.

In a change of tone which signals a more bellicist position, the ECB said that “monetary policy becomes significantly less restrictive”.

Language has suggested a possible slowdown or a break in future interest rate drops, because it compared the previous formulation of the ECB according to which “monetary policy remains restrictive”.

Christine Lagarde, president of the ECB, said that the new wording was “not a little harmless change”, but significant.

In the aftermath of the decision, the merchants reduced their bets on the cuts of future rate.

Although they continued to be fully priced in another decrease of a quarter of a point this year, according to the levels involved by the Swaps markets, the chances of a second drop in 2025 rose from around 85% to around 65%.

The euro increased against the dollar after the BCE decision, up 0.4% to $ 1.083.

“The BCE travel management is no longer as clear,” Carsten Brzeski wrote in ING in a note to customers, pointing to the change of label.

Inflation went from a peak of 10.6% in October 2022 to 2.4% in February and the deposit rate has now been at the lowest since February 2023.

The prospects for the Economy of the euro zone Could also be affected by Friedrich Merz’s moves, the Chancellor in German pending, to release hundreds of billions of euros in borrowing to stimulate defense spending and revise the infrastructure of his country.

Some analysts provide that plans could double Germany’s expected growth next year at 2%.

The German debt, the reference of the euro zone, was not emulated by the decision of the ECB, after a high sale after the announcement of the historic recovery of the country. Bund yields at ten years increased by 0.07 percentage points to 2.86%.

In projections that did not take into account Merz’s announcement this week, the ECB has reduced its growth forecasts for 2025 – its sixth successive demotion for the year – as well as for 2026 and 2027.

It now expects the GDP in the euro zone to increase only 0.9% this year, against its December projection by 1.1%.

“A strong uncertainty, both in the country and abroad, retains the challenges of investments and competitiveness weighs on exports,” said Lagarde Thursday afternoon. Last year, growth was 0.7%slow.

But Lagarde added that “an increase in defense and infrastructure expenditure could also add to growth” and “could also increase inflation thanks to its effects on overall demand”.

Before the BCE’s decision, Goldman Sachs’ economists wrote in a note to customers that the thrust funded by Germany’s debt to much higher defense expenses and infrastructure investment “clearly reduces the pressure” so that the ECB reduces interest rates below 2%.

The ECB increased its inflation forecasts this year compared to its December estimate from 2.1% to 2.3% on the back of higher energy prices.

He added that “most of the measures of underlying inflation” suggested that it remained on the right track to reach its 2%lens.

Pooja Kumra, prices strategist at TD Securities, said the ECB was “certainly more cautious” on the future cuts, when it was referring to the threatened tariffs Donald Trump on the EU.

“With uncertainty around exercise [policy] And the prices, they cannot engage on any path, “she said.

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