ECB cuts rates by 0.25 pct pts but warns of tariff risks to inflation and growth

Brussels –The disinflation process “is well on track,” and estimates “Most measures of underlying inflation suggest that inflation will settle at around our 2 percent medium-term target.” In light of these considerations and even more so these expectations, the European Central Bank Governing Council, as expected, chose to cut interest rates again. A 0.25 percentage point easing that will lead the interest rate on deposits with the central bank will drop to 2.5 percent from March 12, the rate on the main refinancing operations will rise to 2.65 percent, and the interest rate on the marginal lending facility will fall to 2.90 percent.

The inflation expectations trend is behind the choices made in Frankfurt. Experts now point to an overall cost of living at 2.3 percent in 2025, 1.9 percent in 2026, and 2 percent in 2027,  ECB president Christine Lagarde said. Forecasts that contradict Lagarde’s expectation for a return to the benchmark target as early as the middle of this year. However, it will not be so. “The upward revision in headline inflation for 2025 reflects stronger energy price dynamics,” Lagarde warns, sounding alarm bells about the risk of new energy crises after the one that followed the Russian-Ukrainian war.

Lagarde does not hide that everything can change. “A general escalation in trade tensions could see the euro depreciate and import costs rise, which would put upward pressure on inflation.” Today’s (March 6) could be the last rate cut. Net of that, the message for policymakers is to avoid a tariff war to shield themselves from the worst. Because trade tensions “could reduce the pace of growth in the EU area and reduce investment,” the ECB president continues.

Precisely for this reason, “in light of the uncertainties, we will follow a data-dependent and meeting-by-meeting approach.” It means that “if the data suggest that we can cut, we will cut. If, on the other hand, the data suggest not to cut, we will not cut.” At the same time, governments and EU institutions, precisely because of an increasingly unstable and unpredictable framework, should proceed with the policy agenda without delay. “The European Commission’s Competitiveness Compass provides a concrete roadmap for action and its proposals should be swiftly adopted,” the president said.

“There are uncertainties everywhere,” Lagarde bluntly said. That is why, she insists, “governments should ensure sustainable public finances in line with the EU’s economic governance framework and prioritize essential growth-enhancing structural reforms and strategic investment.”  She adds, “An increase in defense and infrastructure spending could also add to growth.” Support for the plan to rearm Europe developed by the Commission.