ECB Lowers Rates, EZ Growth Outlook Amid Rising Uncertainty; Signals Pause Ahead

(RTTNews) - The European Central Bank cut its key interest rates for the fifth policy session in a row and also lowered the growth forecast for the euro area mainly due to prospects of weak exports and investment in the backdrop of high trade uncertainty amid the tariffs war, and signaled a pause in the easing cycle as policy is now deemed less restrictive.

The Governing Council, led by ECB President Christine Lagarde, cut the deposit rate by 25 basis points to 2.50 percent, which is the lowest level since February 2023 when it was at the same level.

The main refinancing rate was lowered by a quarter basis points to 2.65 percent and the lending rate to 2.90 percent, respectively.

The ECB has lowered interest rates by a quarter basis points each in every rate-setting session since September.

"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 observed.

The central bank for the single currency bloc acknowledged the rising uncertainty and asserted that policymakers will follow a data-dependent and meeting-by-meeting approach to determining the appropriate policy stance.

Responding to reporters' questions, Lagarde said the latest rate cut decision was a consensus with no policymaker opposing, but the Austrian central bank governor Robert Holzmann abstaining.

The bank will not pre-commit to a particular rate path, the ECB reiterated. "If the data indicates to us that the appropriate monetary policy move should be to cut, we shall do so. If, on the other hand, the data indicates otherwise, then we shall not cut and we will pause," Lagarde said.

In the latest round of macroeconomic projections, the ECB staff lowered the euro area growth forecast for this year to 0.9 percent from 1.1 percent. The outlook for next year was downgraded to 1.2 percent from 1.4 percent and the prediction for 2027 was retained at 1.3 percent.

"The downward revisions 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 bank said.

"Rising real incomes and the gradually fading effects of past rate hikes remain the key drivers underpinning the expected pick-up in demand over time."

The risks to economic growth remain tilted to the downside, the bank said. An increase in defence and infrastructure spending could add to growth, Lagarde said.

Eurozone inflation forecast for this year was raised to 2.3 percent from 2.1 percent. The projection for next year was retained at 1.9 percent and the outlook for 2027 was lowered to 2.0 percent from 2.1 percent.

Revision in headline inflation for this year reflects stronger energy price dynamics, the ECB said.

Core inflation, which excludes energy and food prices, is expected to average 2.2 percent this year, which is lower than the 2.3 percent predicted in December. The forecast for next year was raised to 2.0 percent from 1.9 percent. The outlook for 2027 was retained at 1.9 percent.

"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," ING economist Carsten Brzeski said. "A pause at the next meeting to come to terms with the new macro reality now looks like a possibility."