The European Central Bank (ECB) has delivered its second 25 basis points interest rate cut of the year, bringing the benchmark deposit rate to 2.5%.
The widely expected cut brings interest rates on the continent lower from their peak of 4% in 2024.
However, the central bank’s meeting has been overshadowed by the announcement of fiscal stimulus in Germany earlier this week and the threat of tariffs from the US.
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Following the decision to cut, ECB president Christine Lagarde (pictured) described policy as “meaningfully less restrictive”.
Mathieu Savary, chief European strategist at BCA Research, said: “The ECB delivered its widely expected rate cut and is set to ease further, with inflation projected to settle at target and growth headwinds persisting.
“However, by describing policy as ‘meaningfully less restrictive’, the ECB acknowledges improving domestic conditions—and, crucially, that fiscal easing is pushing the neutral rate higher. As a result, the likelihood of the deposit rate falling below 2% has significantly diminished.”
Looking ahead, Fidelity International global head of macro and strategic asset allocation Salman Ahmed said: “That the ECB now sees interest rates as ‘meaningfully less restrictive’ was a strong hint that they could pause at the next meeting and thus we now see April as a 50/50 decision that will depend heavily on incoming data and whether President Trump’s anticipated April 2nd tariff announcements include significant measures targeting Europe.”
“We now anticipate the ECB will aim for the lower end of the neutral range — around 1.75% — rather than moving into accommodative territory,” he added.
“This reflects our view that while fiscal announcements give the ECB room to potentially pause in April — barring aggressive tariffs on Europe — they will still want to position monetary policy to support economic recovery given ongoing downside risks from potential trade disruptions.
“Markets are now pricing less than two more cuts this year and a terminal rate of ~2.1%, so we maintain a more dovish outlook, though not as dovish as before this week’s fiscal announcements.”
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Nicolas Sopel, head of macro research and chief strategist at Quintet Private Bank, continues to expect the ECB will lower the deposit rate to 2% by the end of the year.
He said: “The market’s reaction is relatively muted as both FX and fixed income markets currently take cues from geopolitical developments and prospects of a significant fiscal push in Germany.
“This is the main risk to our view, but any fiscal boost has first to be approved by the German Parliament, and it will take some time to feed through to the economy.”