The European Central Bank cut interest rates on Thursday, the sixth consecutive cut as the region's economic landscape changes rapidly.
The bank's key rates increased quarterly points to 2.5% due to relatively low regional inflation and weak economic growth.
However, as policymakers face the shift in the European earthquake, the future path for interest rates is becoming increasingly uncertain. Over the past few days, European leaders have vowed to increase military spending by hundreds of millions of euros, as they are not sure of an alliance with the US. A decade and a half of strict financial constraints in Germany have been broken as the country's next government plans to ease borrowing rules to increase spending on defense and infrastructure.
On Thursday, central bank chairman Christine Lagarde highlighted the pace of the whirlwind of economic and political change taking place in Europe.
“We have not been spared recent developments in the past few hours and days,” she said at a press conference in Frankfurt.
Lagarde said policymakers will be “attentive” and “watched” about these spending plans to determine their impact on inflation. However, she added that bank officials are hoping that additional spending will be added to economic growth. She added that she is pursuing the development of Brussels on Thursday as European leaders gathered to negotiate a defense plan.
Plans that include more borrowings, especially in Germany, have led to yields that European government bonds jump higher, particularly on long-term debt and rising borrowing costs. The outlook for more spending and lower interest rates helped DAX, the German benchmark index, boost stocks at record highs. The euro has also opposed its strongest level against the US dollar in four months, further easing inflationary pressures.
This shaped a financial photograph of Europe as the central bank worked on the prospect of President Trump impose tariffs on the region.
“We have risks,” Lagarde said.
There was a division among members of the European Central Bank's governing council about how low interest rates were. Overall, policymakers show that policies aim for a neutral rate that does not limit or boost the economy. But they said they only knew they reached the rate when they were in it.
On Thursday, the central bank said monetary policy is “meaningly less restrictive.” He said this is a sign that policymakers are approaching a moratorium on interest rate cuts.
As yields rise, traders show that there is potentially one more rate reduction in April or June.
However, Lagarde said the central bank would not commit in advance to the next stage of interest rates. Instead, the data for each policy meeting is determined whether to reduce or suspend.
Lagarde said he “will not be very responsible” for giving stiffer signs. “From one day to the other, things change dramatically.”
The eurozone economy has been slowing since the end of last year, with policymakers significantly cutting interest rates, a 1.5 percentage points cut from last summer, to help businesses and households with more access to loans. The extent of economic weakness surprised policymakers because consumers are slower to spend more money in response to lower inflation. However, the central bank is still forecasting forecasts that the economy will recover later this year.
Still, the central bank predicted slightly slower growth than it was three months ago, predicting lower exports and weaker investments as businesses combat uncertainty about trade policy. The eurozone economy is currently forecast to increase by 0.9% this year and 1.2% next year.
Eurozone inflation slowed to 2.4% in February, data released earlier this week, from 2.5% in the previous month. Inflation in the services sector, which is frustrating and stubborn for policymakers, also slowed to 3.7% from 3.9% in January. Banks expect to reach their 2% target in early 2026, slightly behind previous forecasts due to rising energy prices.
