ECB lowers rates to 3% and paves way for more cuts

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The European Central Bank cut interest rates by a quarter-point to 3 per cent, as it watered down its hawkish language and warned that growth would be weaker than it had previously forecast.

The ECB’s cut — its fourth reduction in borrowing costs since June — takes the central bank’s benchmark deposit rate to its lowest level since March 2023.

Christine Lagarde, ECB president, said some rate-setters had proposed a larger, 50 basis-point cut. But she added that support for the quarter-point move was eventually “unanimous”.

Deutsche Bank economist Mark Wall said: “The door has been opened more clearly to further cuts.”

The ECB’s dovish shift comes as the Eurozone and Germany, its biggest economy, wrestle with weak growth and the threat of a global trade war after Donald Trump enters the White House.

Thursday’s cut came as the ECB warned that the Eurozone economy would grow just 1.1 per cent in 2025, down from its September estimate of 1.3 per cent.

The ECB also lowered its growth forecast for 2026 by one percentage point to 1.4 per cent and is even more pessimistic for 2027, when it expects just 1.3 per cent of GDP growth.

“The element which has changed is the downside risks, particularly the downside risks to growth,” Lagarde said.

She added that Trump’s threats to impose blanket tariffs of up to 20 per cent on all US imports — and the impact on growth — were “not in the baseline”.

That could imply that the export-heavy Eurozone economy would perform even worse than the central bank’s projections should Trump introduce the levies after he returns to office on January 20.

The euro was down 0.2 per cent by late afternoon trading at $1.047.

The ECB dropped its commitment to “keep policy rates sufficiently restrictive for as long as necessary” to bring down inflation in line with its 2 per cent target. Instead it stressed that the “effects of restrictive monetary policy” would be “gradually fading” over time.

“The direction of travel currently is very clear,” Lagarde told journalists,
suggesting that the ECB would ease rates further next year. However, she stressed that “the pace” of cuts would be determined by a meeting-by-meeting approach.

She added that while it was “not yet mission accomplished” on inflation, rate-setters now believed they were “really on track” to hit their 2 per cent goal “sustainably”.

The bank forecast headline inflation of 2.1 per cent in 2025, 1.9 per cent in 2026 and 2.1 per cent in 2027.

“The risks are tilted towards the ECB having to do more, not less, to support the economy in 2025,” said Dean Turner, chief Eurozone economist at UBS Global Wealth Management.

But he cautioned that “this is more likely to result in further cuts later in 2025 rather than larger moves in the near term”.

Investors anticipate that the ECB will cut rates more than the US Federal Reserve next year, given that growth in the Eurozone is widely expected to lag behind that of the US.

“Gradual easing is the message,” said Mariano Cena, senior European economist at Barclays.

Traders in swaps markets largely kept their bets unchanged after the decision. They broadly expect the ECB to carry out a further five quarter-point cuts by next September, which would take the deposit rate to 1.75 per cent.

“If incoming economic data was to weaken further, say on elevated uncertainties over trade tariffs . . . then a larger cut would be feasible,” said MUFG’s head of research Derek Halpenny.

Swaps markets are pricing in around 0.75 percentage points of cuts from the US Federal Reserve over the same time period, which would bring the target range down to between 3.75 and 4 per cent.

Earlier in the day, the Swiss National Bank halved its main policy rate to 0.5 per cent, a bigger-than-expected cut.