ECB cuts rates by 25 bps, leaves little space for further cuts

The European Central Bank (ECB) on Thursday announced a 25 basis point reduction in key policy interest rates, on the basis of inflation outlook in the Euro zone. ECB said its governing council decided to lower the three key ECB interest rates by 25 basis points each on the basis of an assessment of the dynamics of underlying inflation.

Accordingly, the interest rates on banks’ deposits, refinancing operations and the marginal lending facility will stand reduced to 2.50 per cent, 2.65 per cent and 2.90 per cent, respectively, with effect from 12 March 2025.

As per ECB’s assessment, the disinflation process is well on track and broadly on expected levels - averaging 2.3 per cent in 2025, 1.9 per cent in 2026 and 2.0 per cent in 2027. The uptrend in headline inflation for 2025 is attributed to higher energy prices. The bank projects inflation excluding energy and food to average 2.2 per cent in 2025, 2.0 per cent in 2026 and 1.9 per cent in 2027.

The governing council expects medium-term inflation level to stay around 2 per cent. ECB said the high domestic inflation has been due mainly to wage hikes and prices in certain sectors will take time to adjust. But wage growth is moderating as expected, and profits are partially buffering the impact on inflation.

While interest rate cuts have made borrowing less expensive, loan growth continues to be subdued due to a slower transmission of financing conditions. Economic growth is also expected to remain subdued across the Euro area with growth projections of 0.9 per cent for 2025, 1.2 per cent for 2026 and 1.3 per cent for 2027. 

ECB expects exports and investments to reflect policy uncertainty, especially the US administration’s tariff policy.