The European Central Bank cut its benchmark interest rate by a quarter point to 2.5% on Thursday as inflation nears 2% and growth remains weak.
The ECB reduced its interest rates on Thursday afternoon during its March meeting, as analysts had anticipated.
The interest rates on the deposit facility, the main refinancing operations and the marginal lending facility will be decreased to 2.50%, 2.65% and 2.90% respectively, with effect from 12 March 2025.
The interest rate on the main refinancing operations is the rate banks pay when they borrow money from the ECB for one week, while the rate on the deposit facility is what banks can use to make overnight deposits with the Eurosystem.
The rate on the marginal lending facility, meanwhile, offers overnight credit to banks from the Eurosystem.
“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 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 economy faces continued challenges and staff have again marked down their growth projections – to 0.9% for 2025, 1.2% for 2026 and 1.3% for 2027.”
Stubborn inflation
The decision comes after inflation cooled to 2.4% in the eurozone in February, higher than the forecasted 2.3%.
While price pressures are nearing the ECB’s 2% target, the total was predominantly driven up by services inflation – which came to 3.7% year-on-year.
On a monthly basis, consumer prices also rose 0.5% from January, the steepest increase seen since April 2024.
Looking ahead, the prospect of a trade war with the US raises the chance that these totals could rise.
US President Donald Trump is threatening a 25% tariff on EU imports and the bloc has warned it would retaliate with its own levies.
Another factor complicating the eurozone’s economic future is Russia’s war in Ukraine.
With the new US administration pulling back military support for the EU, member states must raise their own military budgets, pushing up spending and debt levels.
Stuttering growth
While managing these risks, policymakers are also conscious of lacklustre growth across the eurozone.
In the final quarter of 2024, seasonally adjusted GDP increased by 0.1% quarter-on-quarter in the eurozone and by 0.2% in the EU, according to Eurostat.
“The euro-zone economy performed a little better than previously thought in Q4, but growth was still extremely weak and the early signs are that it got off to a slow start to 2025,” Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics, said.
“The key point is that a 0.1% expansion is hardly something to get excited about,” he added.
Across the Atlantic, the Federal Reserve will be making its next monetary policy decision on 19 March.
It’s forecasted that US interest rates will be cut two or three times in 2025, although these moves may come later in the year.
