The European Central Bank on Thursday, March 6, decided to cut interest rates for the sixth time since June.
The mentioned financial regulator also signaled that the cycle of easing its monetary policy may be nearing completion. In the context of the relevant statement, attention was drawn to the fact that inflation in the European Union is on a downward trajectory. It was also mentioned in this case that the economic system of the region is facing the impact of seismic shifts in the geopolitical space. It is worth noting that the European Central Bank has decided to once again lower the cost of borrowing against the backdrop of a realistic prospect of a trade war with the United States. Moreover, plans to increase military spending are currently being actively discussed within the framework of European political discourse. Against the background of the current global state of affairs, which is more extensive than the situation in individual regions, there is a high probability of significant changes in the concept of economic policy of the European Union.
On Thursday, the European financial regulator decided to cut the deposit rate by a quarter of a point, to 2.5%. It’s worth noting that this decision coincides with the preliminary forecasts of the majority of experts interviewed by the media. Currently, officials of the European Central Bank characterize the monetary policy of this financial institution as meaningfully less restrictive.
The interest rates on the main refinancing operations and the marginal lending facility were decreased to 2.65% and 2.9% respectively.
Inflation will take a little longer than initially expected to reach the 2% target. The corresponding statement was made on Thursday by the President of the European Central Bank, Christine Lagarde. She also noted that the financial institution is switching to a more evolutionary approach. Moreover, Christine Lagarde once again stated that policymakers will not commit any particular path to the cost of borrowing. In this context, she noted that the situation is changing dramatically day by day.
During a conversation with media representatives in Frankfurt, Christine Lagarde stated the need for policymakers to be agile and extremely vigilant in responding to the data. In this case, it implies information about the dynamic of the economic situation. Christine Lagarde said that if the data indicate that cutting interest rates is the most appropriate monetary policy measure, then the corresponding decision will be made. If, as she noted, information about the situation demonstrates that the most expedient action would be to abandon lowering the cost of borrowing, the financial regulator will pause.
The media drew attention to the wording changes in the official statements of the European Central Bank regarding interest rates. With a high degree of probability, this circumstance will become a factor in strengthening assumptions that the financial regulator will pause in the implementation of the process of consistent monetary policy easing. The materialization of the corresponding likelihood means that next month the cost of borrowing in the European Union will remain at the current level. The financial regulator’s present rhetoric clearly signals that officials are confident that inflation is approaching the target of 2%. It is worth noting that, in general, for the region’s economy, the strategy of the European Central Bank, which provides for a pause in cutting interest rates, is rather bad news. The European Union is currently under pressure from factors such as the tightening of the United States trade policy and the glut of spending to retool the continent’s armies, which will have specific financial consequences.
The European Central Bank stated that the disinflation process is well on track. According to Christine Lagarde, the 2% target will be reached at the very beginning of 2026. It is worth noting that the initial expectations stipulated that the mentioned goal would become a fact of objective economic reality in 2025.
Against the background of the news about the decision of the European Central Bank to cut interest rates, the euro continues to show growth. At the same time, the bonds were on a downward trajectory following the financial regulator’s announcement. However, the yield on 10-year German bonds rose by five basis points to 2.84%. At the same time, traders pared wagers on further easing of the European Central Bank’s monetary policy on just 43 basis points by year-end.
Carsten Brzeski, ING’s global head of macro, stated that given the increased uncertainty and prospects for large-scale fiscal incentives, the direction of the financial regulator’s actions after Thursday’s decision to cut interest rates is not as clear as it was a few weeks ago. The expert also noted the likelihood of a pause in lowering the cost of borrowing at the next meeting of the European Central Bank on monetary policy to come to terms with the new macro reality.
The updated quarterly forecasts were mostly confirmed by the financial regulator’s outlook on prices while lowering it for growth in the current year and in 2026.
The inflation indicator is currently unambiguously favorable from the point of view of the European Central Bank. The corresponding figure dropped to 2.4% last month. It is also particularly important that the rise in service prices, which European Central Bank officials are paying close attention to, has demonstrated the first significant retreat from the 4% mark since April 2024.
It is possible that the final stage of the current monetary policy easing cycle of the financial regulator may become a period of highly intense disputes. In this case, it implies a confrontation between supporters of so-called hawkish and dovish positions. The issue of the configuration of monetary policy at the time of the pause in the process of lowering the cost of borrowing is obviously important.
It is worth noting that the first signs of an improvement in confidence in the European Union are currently being observed. In the context of this statement, it is worth noting that Germany, which has the largest economic system in the region, is on its way to forming a stable government after the elections held last month.
Christine Lagarde described the risks to economic expansion as still tilted to the downside. She noted that uncertainty has increased and this factor is likely to weigh on investment and exports compared to preliminary expectations on the relevant occasion. According to her, economic growth should be supported by higher incomes and lower borrowing costs.
Christine Lagarde said that the increase in defense spending should perk up the economy of the European Union. Brussels intends to mobilize about 800 billion euros ($861 billion) for military expenditure. If the military production capacity is expanded, it will be a significant factor in stimulating economic growth in the eurozone. At the same time, it is worth noting that not all of the 20 members of the bloc have the same fiscal space as Germany. This circumstance means that additional outlays can put pressure on already stretched budgets and provoke a negative reaction among bond investors.
It is worth noting that on Thursday, the European Central Bank lowered its economic growth forecast for 2025. The revision of this forecast occurred for the fourth time in a row. The financial regulator expects that in the current year, the economy of the European Union will show growth of 0.9%. It is worth mentioning that last year the pace of the corresponding upward dynamic was recorded at the 0.7% mark.
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