From Morningstar: 2025-03-06 10:04:07

The European Central Bank cut its key interest rate by 0.25 percentage points to 2.50%, revising economic growth forecast downwards and inflation forecasts upwards. The ECB stated monetary policy is less restrictive, citing rising uncertainty. President Lagarde noted risks to Europe’s economy from trade tensions and geopolitical uncertainty. No council member opposed the decision, with one abstention.

Changes in ECB’s key interest rates show a gap between US and Europe rates. Fed maintained its rate at 4.25%-4.50%, with a 91% probability of no change in March. The Bank of England made its third rate cut in February to 4.5%. Sweden’s Riksbank is not expected to cut rates on March 20, while Swiss National Bank cut rates to 0.50% in 2024.

Eurozone growth projections were marked down to 0.9% for 2025. Inflation is expected to average 2.3% in 2025, with a core CPI of 2.2%. The downward revisions reflect lower exports and investment, due to trade policy uncertainty. Headline CPI is revised due to stronger energy price dynamics.

After the ECB rate cut, the euro rose against the dollar, showing investor confidence in a less dovish ECB. German Bund yields increased, widening the spread between eurozone government and Germany debt. European stock exchanges were modestly weaker post-announcement.

Short-term interest rate markets predict consecutive ECB rate cuts through June, possibly taking the deposit rate to 2%. Uncertainties like geopolitical tensions and tariffs could prompt further rate cuts. Investors are advised to consider uncertainty in the near-term outlook for the ECB.

Germany’s proposed defense and infrastructure spending plan led to a surge in Bund yields. If approved, it could benefit the German and eurozone economy. The ECB may need to consider the plan’s implications on future rate decisions. The risk of quicker rate cuts by the ECB remains a downside risk for banks’ financial results.



Read more at Morningstar: ECB Cuts Rates and Warns of Trade War Risks