The rate cut comes as the ECB seeks to alleviate pressure on consumers and businesses amid sluggish economic growth in Europe, and the threat of trade tensions with the US.
The European Central Bank (ECB) on Thursday announced it is lowering its benchmark deposit rate to 2.5% as it aims to bolster economic growth by lowering the costs of borrowing money for consumers and businesses in the eurozone.
As it announced the rate cut, the ECB also forecast the eurozone in 2025 to grow slower than expected by 0.9% in 2025, and 1.2 % in 2026.
By cutting interest rates, the ECB is aiming to spur economic growth among the 20 countries that use the euro. The eurozone showed zero growth during the last three months of 2024.
The key refinancing rate, which provides the banking system with liquidity, was also lowered to 2.65%
Against the background of the US imposing tariffs on its allies, European Central Bank President Christine Lagarde said Thursday that “an escalation in trade tensions would lower euro area growth by dampening exports and weakening the global economy.”
Economic headwinds for Europe
European countries are currently debating an increase in defense spending, which could increase infrastructure spending and overall growth, but also contribute to inflation.
Lagarde said Thursday that the eurozone faces “risks, uncertainty all over” and the threat of a trade war with the US under Donald Trump, and the potential impact of tariffs on European imports to the US, call for a looser monetary policy to increase domestic spending on European goods.
Germany’s spending spree?
In Germany, the eurozone’s largest economy, the CDU/CSU conservatives and the left-leaning SPD are determined to form the country’s next government. The two factions have recently announced plans to raise hundreds of billions of euros to boost defense and infrastructure.
In addition to proposals on lifting the German debt ceiling, a new special fund of €500 billion ($541 billion) would be set up for infrastructure spending for a period of 10 years. If the proposals are passed by the outgoing parliament, they could contribute to stronger growth in Germany.
Lagarde said Thursday the German proposal was a “work in progress” and its impacts are yet unclear.
Inflation in the rear-view?
The Frankfurt-based ECB said the fight against inflation, which had topped off above 10% in October 2022, was going well.
Although energy-price-driven inflation forecast for 2025 remains sticky at 2.3% the central bank said it sees its goal of price stability within reach.
Interest rate hikes are a tool used by central banks to curb inflation by making the cost of borrowing higher, thereby reducing investment, which leads to less demand for goods and services and can eventually lower prices.
At one point, the ECB’s interest rate was at a record high 4% as inflation soared. It has been reduced several consecutive times since June 2024 as the price growth subsided.
Edited by: Darko Janjevic
DW News
