The European Central Bank (ECB) reduced its key interest rate by 25 basis points on Thursday, marking its sixth cut in nine months.
However, policymakers cautioned that uncertainty remains high, with potential inflationary pressures from trade tensions and increased defence expenditure possibly influencing future decisions.
ECB officials reiterated that the disinflation process is progressing as expected, with inflation projections closely aligned with previous estimates. Staff forecasts now indicate headline inflation will average 2.3% in 2025, 1.9% in 2026, and 2.0% in 2027, with slight upward revision for 2025 reflecting stronger energy price dynamics.
Core inflation, excluding energy and food, is projected at 2.2% in 2025, 2.0% in 2026, and 1.9% in 2027.
Recent data showed eurozone inflation easing to 2.4% in February, slightly higher than expected but lower than January’s reading. Core inflation and services inflation also declined after remaining stubbornly high for months.
ECB President Christine Lagarde highlighted that monetary policy is becoming less restrictive as inflation moves closer to the 2% target.
At the press conference following the policy decision, she stated: "We take account of the journey that we have travelled – 150 basis points since we started cutting – and we acknowledge the fact that, as a result, (policy) is becoming meaningfully less restrictive."
Lagarde stressed that future rate decisions would be heavily dependent on economic data. While the ECB has previously signalled a clear downward trajectory for rates, she refrained from repeating that guidance, noting that both a cut and a pause remain possibilities.
Updated projections indicate the ECB will not reach its 2% inflation target until the first quarter of 2026, a delay that may concern some policymakers.
Regarding Germany’s planned defence infrastructure spending, Lagarde remarked: “We have to be attentive, vigilant; we have to understand how this is going to work, what the timing will be, what the financing will be, so that we can then draw the conclusions and appreciate how much it will contribute to growth and what impact it would have eventually on inflation.”
