The European Central Bank (ECB) has reduced interest rates throughout the eurozone for the second time this year in an effort to strengthen economic activity. This move comes as Europe prepares for the possibility of Donald Trump imposing damaging tariffs on EU exports to the United States.
In response to these factors, the ECB, headquartered in Frankfurt, decreased its benchmark deposit rate by a quarter of a percentage point to 2.5%, in line with the expectations of City economists. This decision aligns with similar actions taken against Canada and Mexico, as Trump prepares to impose 25% tariffs on all goods imported from the EU.
According to the ECB’s announcement, “The disinflation process is well on track. Inflation has continued to develop broadly as staff expected, and the latest projections closely align with the previous inflation outlook.”
Despite six cuts in borrowing costs over the past year, ECB officials are hesitant to implement further reductions due to the volatile international situation and the recent decline in inflation, which could potentially reverse.
Inflation fell to 2.4% in February, down from 2.5% in January, according to a flash estimate by Eurostat. Services inflation also experienced a drop, falling below 3.9% for the first time since April 2024. However, any increases in energy prices resulting from the uncertainty surrounding the Russian invasion of Ukraine could disrupt projections of inflation returning to the target rate of 2% by the first quarter of 2026.
The deposit rate determines the interest received by banks when they deposit funds with the eurosystem on an overnight basis. In addition, the ECB also reduced its main refinancing rate, paid by banks when borrowing funds from the central bank on a weekly basis, by a quarter of one percentage point to 2.65%. The marginal lending facility rate, charged when borrowing overnight from the ECB, was also reduced from 3.15% to 2.90%.
Furthermore, the ECB is under pressure to prevent a sharp increase in borrowing costs for eurozone governments, particularly after Friedrich Merz, the German chancellor-in-waiting, pledged to “do whatever it takes” to rearm Germany.
Source: https://www.theguardian.com/business/2025/mar/06/european-central-bank-cuts-interest-rates-trump-tariffs
