ECB makes fifth straight rate cut

As expected, the European Central Bank (ECB) cut its policy rates today for the sixth time in this cycle, marking its fifth straight cut. The interest rate on the main refinancing operations, the marginal lending facility, and the deposit facility were each lowered by 25 basis points to 2.65%, 2.90%, and 2.50%, respectively.

While today’s decision to cut rates was no surprise, the future path is less certain. With policy rates “meaningfully less restrictive” and inflation expected to head back toward target by early 2026, the need for significant further rate cuts has faded. Yet, the ECB also needs to consider the following crosscurrents: elevated trade policy uncertainty, geopolitical developments, greater European defence spending, and Germany’s announced plans for one of the largest fiscal regime shifts in post-war history.

Against this backdrop, the ECB is embracing a data-dependent approach, giving little hint as to the timing of further rate cuts. Yet, reading between the lines and taking into consideration Germany’s fiscal shift, the central bank is likely to slow the pace of easing and may be nearing the end of this cutting cycle.

Recent developments

While European data have been fairly lackluster, showing only slight signs of improvement, the economic outlook could be significantly impacted by the events and announcements of recent days. In particular, the potential dramatic increase in Germany’s public investment levels—if approved—could have significant spillover effects on the entire Eurozone, driving stronger growth and reducing the need for additional monetary stimulus. On the other hand, however, there is the threat of U.S. import tariffs and the negative impact on investment and export growth.

ECB President Christine Lagarde acknowledged all these factors but also noted that their impact has not been measured. Indeed, there remains significant uncertainty as to whether the various measures will even be confirmed. As a result, the ECB’s decision making will need to be based on how the economy and, specifically, how inflation evolves over the coming months.

Forecast changes

New ECB staff projections showed a slight upward revision to inflation in 2025 because of energy price dynamics. Inflation is expected to return to the 2% target in early 2026, slightly later than they previously expected. However, Lagarde noted that these forecasts were based on energy prices a few weeks ago, prior to the geopolitical developments. In other words, these forecasts could be quite different if the exercise were repeated today.

ECB growth projections were lowered again for both 2025 and 2026—however, it is possible that the recent news flow may boost these forecasts.

Policy outlook

In a week of turmoil and uncertainty, the ECB reassuringly dropped no surprises. The path forward, however, is packed to the brim with uncertainty. Even before Germany’s bazooka headlines, some ECB officials seemed reluctant to cut rates beyond this month. Now, with potential growth (maybe) having received an important and historic fiscal boost, the prospects of further easing have dropped. Yet, offset that with the prospect of tariffs, plus a cooling U.S. economy that will inevitably weigh on global growth, and the result is a heavily data-dependent ECB. Our expectation is a pause in April, followed by two further rate cuts in 2025—but note that the outlook will be heavily influenced by trade tariffs and approval of Germany’s fiscal plans. 

Principal Asset Management