The European Central Bank lowered interest rates for the sixth time since June and indicated that its cutting phase is drawing to a close as inflation cools and the economy digests seismic shifts in geopolitics.
The deposit rate was reduced by a quarter point to 2.5%, as predicted by all but one analyst in a Bloomberg survey. Officials described their monetary-policy stance as becoming “meaningfully less restrictive.”
“The interest-rate cuts are making new borrowing less expensive for firms and households and loan growth is picking up,” the ECB said in a statement. “At the same time, a headwind to the easing of financing conditions comes from past interest rate hikes still transmitting to the stock of credit, and lending remains subdued overall.
The change in language will feed speculation that policymakers are contemplating a timeout from rate cuts next month, confident that their 2% inflation goal is within reach. That may be bad news for Europe’s stuttering economy, which as well as US trade tariffs must now also deal with a glut of spending to retool the continent’s armies.
Updated quarterly projections largely confirmed the ECB’s outlook for prices, while lowering it for growth this year and next. But they don’t capture the consequences of President Donald Trump’s abrupt pullback in military backing for Ukraine and Europe.
That jolt alone looks set to trigger hundreds of billions of euros in new defense outlays by European governments, with implications for inflation, economic expansion and debt. Leaders will work on the details at a summit on Thursday.
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President Christine Lagarde is likely to face questions on the topic, as well as on ECB policy, during her press conference at 2:45 p.m. in Frankfurt.
Things have been looking up for the ECB on the inflation front. February’s reading dipped to 2.3% and, crucially, a closely watched gauge of services-price increases registered its first major retreat from 4% since April 2024.
Confidence, too, has showed fledgling signs of improvement, with Germany — Europe’s largest economy — on track to get a stable government following last month’s election.
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Uncertainty has risen of late, however, with Trump’s stance on Ukraine leaving Europe in the driving seat of that country’s — and its own — defense.
The European Union is now looking to mobilize about €800 billion ($1.15 trillion) for military expenditure, with German Chancellor-in-waiting Friedrich Merz pledging to do “whatever it takes” to defend his nation.
Such a splurge could perk up growth in the euro zone, if military-production capacities can be expanded to meet the spending needs. But not all of the bloc’s 20 members have the same fiscal space that Germany does, meaning additional outlays could pressure already stretched budgets and prompt a negative reaction among bond investors.
