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ECB Cuts Again and Signals Easing Phase Is Nearing Its End - BLOOMBERG
Jana Randow, Mark Schroers and Alexander Weber
(Bloomberg) -- The European Central Bank lowered interest rates for the sixth time since June and indicated that its cutting phase may be drawing to a close as inflation cools and the economy digests seismic shifts in geopolitics.
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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.”
Revealing that inflation will take slightly longer to reach 2%, the ECB is switching “to a more evolutionary approach,” President Christine Lagarde said Thursday. She repeated that policymakers won’t commit to any particular path for borrowing costs, since the backdrop is changing “dramatically” from one day to another.
“We will all have to be extremely vigilant — we will have to be agile, to respond to the data,” Lagarde told reporters in Frankfurt. “If the data indicate that the most appropriate monetary-policy stance is a cut, it will be a cut. If, on the other hand, the data indicate that the most appropriate decision is not to cut, then it will be a pause.”
Changing its statement language will feed speculation that the ECB is contemplating a timeout from rate cuts next month, confident that its 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.
“The disinflation process is well on track,” the ECB reiterated. Lagarde said it will now meet its goal very early in 2026, rather than this year as envisaged before.
The euro extended gains to hit the day’s high while bonds fell following the ECB’s statement. The yield on 10-year German notes was up five basis points to 2.84%, while traders pared wagers on further easing to bet on just 43 basis points more by year-end.
“With the increased uncertainty and the prospects of large fiscal stimulus, the ECB’s direction of travel after today’s rate cut is no longer as clear as it was a few weeks ago,” Carsten Brzeski, ING’s global head of macro, said by email. “A pause at the next meeting to come to terms with the new macro reality now looks like a possibility.”
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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Things have been looking up for the ECB on the inflation front. February’s reading dipped to 2.4% and, crucially, a closely watched gauge of services-price increases registered its first major retreat from 4% since April 2024.
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“The final stages of the easing cycle will be much more contentious among members of the Governing Council than recent moves have been and the debate between hawks and doves is likely to heat up.”
—David Powell and Jamie Rush. Click here for full REACT
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.
Lagarde, however, described risks to economic expansion as still tilted to the downside.
“Uncertainty has increased and is likely to weigh on investment and exports by more than previously expected,” she said. “Growth should be supported by higher incomes and lower borrowing costs.”
Lagarde said higher defense spending should perk up the economy after the shock movements in US foreign policy left Europe in the driving seat of Ukraine’s — and its own — defense.
The European Union is looking to mobilize about €800 billion ($861 billion) for military expenditure, with German Chancellor-in-waiting Friedrich Merz pledging to do “whatever it takes” to defend his nation.
