It is the fifth drop in a row. The European Central Bank continued on Thursday, March 6, its policy of relaxing interest rates, but its monetary course has never been so uncertain for the continuation in a context of commercial wars with the United States and increase in defense expenses expected in Europe.
By lowering, as expected, its main key interest rate of 0.25 percentage points, the Frankfurt institution marks its confidence in the gradual return of inflation to the target of 2 %. The deposit rate, which refers, is thus reduced from 2.75 % to 2.50 %.
Is the end of this drop cycle in sight? The Euro guards stressed Thursday in their press release that rates are now at a level at which monetary policy “becomes significantly less restrictive”, strengthening the expectations of a break up in the decreases. The ECB cannot engage in advance on the rest of its monetary course and rate reductions because the euro zone is confronted “with risks and uncertainty everywhere,” said its president Christine Lagarde on Thursday.
But the economic horizon is more uncertain than ever and the equation has been significantly complicated in recent weeks for the ECB. The radical decision of the future German government to increase public debt for armaments expenses has already caused a thrust of the loan rates in Germany, unprecedented since reunification.
“Climbing trade tensions”
This tightening of the financial conditions occurs while the activity of the euro zone remains low and is added the imminent taxation of reciprocal customs duties by the United States which threatens to bring recession to Europe. The context obliges the ECB to juggle between objectives that are sometimes difficult to reconcile: mastering inflation while supporting growth in a euro zone weakened by successive crises. Christine Lagarde warned Thursday against “an escalation of trade tensions” and its consequences for the euro zone, faced with the customs of customs announced by Donald Trump. This would “reduce the growth of the euro zone by slowing down exports and weakening the world economy,” she said at a press conference, after announcing a new drop in interest rates in the institution.
The members of the ECB have appeared divided in recent weeks on the continuation of the monetary cycle. Isabel Schnabel, member of the Management Board, suggested that it may be time to discuss a break in March, because the rates are already getting closer to a level that does not penalize or promote the economy, leaving little margin to soften them again. Other members of the Council of Governors of the ECB believe that it is too early to open this debate, given the recent quasi-stagnation of the euro zone GDP in the last quarter of 2024, especially due to a high cost of the loan.
On the other hand, the colossal expenses provided by Germany, freeing itself from the dogma of rigor, could boost European growth and inflation. In this context, “the expectations of decreasing the rates of the ECB (could) be reconsidered,” said Kathleen Brooks, research director of the XTB trading platform.
The evolution of the conflict in Ukraine, a country which can no longer count largely on American aid in the face of the Russian aggressor, could also influence the economic trajectory and therefore the decisions of the ECB. These risks are not yet fully integrated into the latest economic projections published Thursday by the institution.
The ECB has enhanced its inflation forecasts for 2025 because of the increase in energy prices, and lowered its growth forecasts for 2025 and 2026 in the face of “the drop in exports and the persistent weakness of investments”.