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The European Central Bank has reduced its benchmark interest rate by a quarter-point to 2.5 per cent, as it signalled a possible slowdown in cuts to borrowing costs.
Thursday’s widely expected move is the sixth reduction in the ECB’s deposit rate since the central bank started its rate-cutting cycle last June, when the benchmark stood at a record high of 4 per cent to counter surging inflation.
In a change of tone that signals a more hawkish stance, the ECB said that “monetary policy is becoming meaningfully less restrictive”.
The language suggested a possible slowdown or pause in future interest cuts, since it compared with the ECB’s previous wording that “monetary policy remains restrictive”.
In the immediate aftermath of the decision, traders scaled back their bets on future rate cuts.
While they continued to expect one or two further quarter-point cuts over the rest of the year, according to levels implied by swaps markets, the chance of the second cut fell from around 85 per cent to roughly 60 per cent.
The euro rose against the dollar after the ECB decision, up 0.2 per cent at $1.081.
Inflation has fallen from a peak of 10.6 per cent in October 2022 to 2.4 per cent in February and the deposit rate is now at its lowest since February 2023.
The prospects for the Eurozone economy could also be affected by moves by Friedrich Merz, Germany’s chancellor-in-waiting, to unleash hundreds of billions of euros in borrowing to boost defence spending and overhaul his country’s infrastructure.
Some analysts forecast that the plans could double Germany’s expected growth next year to 2 per cent.
In projections that did not take into account Merz’s announcement this week, the ECB cut its growth forecast for 2025 — its sixth successive downgrade for the year — as well as for 2026 and 2027.
It now expects Euro area GDP to increase by only 0.9 per cent this year, compared with its December projection of 1.1 per cent. Growth last year was a sluggish 0.7 per cent.
Ahead of the ECB decision, Goldman Sachs economists wrote in a note to clients that Germany’s likely debt-funded push for much higher defence spending and infrastructure investment “clearly lowers the pressure” for the ECB to cut interest rates below 2 per cent.
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