The European Central Bank (ECB) cut interest rates as expected on Thursday (Mar 6) and kept the door ajar to more, even as a looming trade war with the US and plans to boost military spending drive Europe’s biggest economic policy upheaval in decades.
ECB President Christine Lagarde said that rising trade tensions could knock eurozone growth, as US President Donald Trump threatens higher tariffs on trade partners.
“An escalation in trade tensions would lower euro area growth by dampening exports and weakening the global economy,” Lagarde told reporters after the announcement.
Easing for the sixth time since June, the ECB lowered its deposit rate to 2.5 per cent in a nod to slowing inflation and faltering growth, and said that rates were still restricting growth, even if less so than in the past.
That wording suggests that more rate cuts may be coming as the bank has long declared that restriction is no longer necessary while inflation, at 2.4 per cent last month, is safely heading back to its 2 per cent target this year.
“Monetary policy is becoming meaningfully less restrictive,” the ECB said in a statement, changing its previous guidance that rates remained restrictive. “The disinflation process is well on track.”
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The nuanced language means that another rate cut in April is not a given, as policy hawks are already arguing for caution.
The ECB also lowered its 2025 economic growth forecast for the fourth straight time on Thursday, putting expansion in 2025 at just 0.9, only slightly above the 0.7 per cent pace recorded last year.
Inflation was meanwhile seen at 2.3 per cent this year, above the 2.1 per cent seen three months ago.
“The downward revisions (in growth) 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,” it said.
ECB President Christine Lagarde may acknowledge that these projections only partially reflect the outlook given exceptional changes since the cut-off date for preparing these figures.
A trade war with the United States is looming and firms are already holding back investment, awaiting clarity on measures to be directed at the European Union and how tariffs imposed on others could redirect trade flows.
Meanwhile Germany and the European Commission have both announced transformational changes in fiscal rules to boost defence and infrastructure spending, partly to replace US support for Ukraine – a tectonic shift that could impact growth for years.
While more spending is better for growth, it could also add to price pressures, and measures of longer-term inflation have surged from around 2.05 per cent early this week to 2.24 per cent by Thursday, an unusually large shift.
But the ECB does not act on short-term volatility so that change will not be enough for now to alter the debate, even if policymakers are likely to notice and raise the issue in the coming weeks.
The projections are still relevance since they embed market bets on rate cuts and with inflation is still seen at 2 per cent by the end of the year, then at least two more rate cuts remain the ECB’s base case.
Also suggesting that easing has room to run, the ECB’s models show the deposit rate stops restricting growth in the 1.75 per cent to 2.25 per cent range.
Markets are pricing almost two more rate cuts this year after Thursday’s move, slightly less than before Tuesday’s German budget announcement but still broadly in the range of expectations seen in the past few weeks. REUTERS, AFP
