Last Thursday’s rate cut has lowered the ECB deposit rate to 2.5%, its lowest level since December 2022. The central bank has been aggressive in its easing cycle, having cut rates by 185 basis points in just nine months.
The ECB rate statement was cautiously optimistic about inflation. Members noted that although “domestic inflation remains high”, underlying inflation is expected to settle close to the 2% target on a sustained basis. The ECB is currently projecting headline inflation of 2.3% and core inflation at 2.2% in 2025, slightly above the 2% target.
Analysts are calling today’s rate move the “last easy cut” as economic and political developments are moving at a dizzying pace. US President Trump has unleashed a barrage of tariffs, some of which have been suspended. Trump hasn’t imposed tariffs against the European Union but there are growing concerns that the US could put tariffs on cars and other products as early as April. The EU has announced it will retaliate if the US imposes tariffs on EU goods and that could lead to a full-blown trade war between the two giant economies. It would also make the inflation picture more uncertain and complicate any ECB plans to lower rates.
In the wake of the new US administration’s moves to impose a peace treaty on Ukraine, the EU is scrambling to support Kiev. Germany has proposed to ease its strict borrowing limits and boost its spending on defense and infrastructure. This marks a huge change in fiscal spending by the largest economy in the eurozone. German bonds have tumbled in response to the spending plan, while yields have skyrocketed. The euro has surged as well, climbing 4.3% this week.
In the aftermath of the ECB rate decision, the EUR/USD currency pair is up 0.40% and has pushed above the 1.08 line for the first time since November 2024.
Key European stock markets are showing mixed numbers today. The German DAX 40 Index is up 162 points (0.7%) and is at 23,273. The French CAC 40 Index has declined by 27 points (0.34%) and is at 8143 points.
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