By Balazs Koranyi and Francesco Canepa
FRANKFURT (Reuters) – The European Central Bank cut interest rates as expected on Thursday and kept the door ajar to more, even as a looming trade war with the United States and plans to boost military spending drive Europe’s biggest economic policy upheaval in decades.
Easing for the sixth time since June, the ECB lowered its deposit rate to 2.5% 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 central bank has long declared that restriction is no longer necessary once inflation, at 2.4% last month, is safely heading back to its 2% 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 nuanced language means a further rate cut in April is not a given, with policy hawks already arguing for caution. ECB President Christine Lagarde said this latest cut was widely backed, with only Austrian central bank chief Robert Holzmann abstaining.
Lagarde said the ECB would not pre-commit to further moves.
“If the data indicates to us that in order to reach (our) destination, the appropriate monetary policy should be to cut, we shall do so,” she told her regular press conference.
“If, on the other hand, the data indicates that is not the case, then we shall not cut and we will pause.”
Lagarde said the bank was watching how the transformational changes to fiscal rules announced this week by Germany and the European Commission to boost defence and infrastructure spending would play out.
“This is work in progress. We have to be attentive and vigilant, and understand how this will work,” she said. “On both accounts, that would be supportive to European growth at large.”
The ECB lowered its 2025 economic growth forecast, released quarterly, for the fourth consecutive time, putting expansion in 2025 at just 0.9%, only slightly above the 0.7% pace recorded last year.
Inflation was meanwhile seen at 2.3% this year, above the 2.1% seen three months ago. Lagarde nevertheless said disinflation in the euro area remained on track and that inflation was due to hit the target of around 2% by early 2026.
“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,” the ECB’s statement said.
GLOBAL UNCERTAINTY
The level of uncertainty in the global economy was something to which Lagarde referred repeatedly in her press conference.
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.
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% early this week to 2.24% 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.
(Editing by Catherine Evans)
