Rate cut, ECB warns of "phenomenal uncertainty" - Risk of trade wars, defense spending could fuel inflation
The European Central Bank cut interest rates again but warned of “phenomenal uncertainty,” including the risk that trade wars and more defense spending could fuel inflation. The changes raise the possibility of a pause in policy easing next month.
The central bank cut interest rates for the sixth time since June, to 2.5%, in response to slowing inflation and weaker economic growth. The institution also stressed that monetary policy is becoming less restrictive as inflation approaches its 2% target.
While this wording could suggest further interest rate cuts, ECB President Christine Lagarde declined to repeat her previous guidance and stressed that a cut or a pause were both possibilities.
"Monetary policy is becoming less restrictive," Lagarde said. "It's not just a small, harmless change, it's a change that has a certain meaning."
Official sources see a growing chance of a pause in April as they seek greater clarity on trade and fiscal policy. But rates are still expected to be cut this year as a 2.5% rate is still constraining the eurozone economy, which is teetering on the brink of recession.
The central bank has long said that the restriction will no longer be necessary when inflation, which was 2.4% last month, is on track to meet its target this year.
Lagarde said the Bank would be even more dependent on incoming data than in the past and that it would stop easing if figures suggested it was needed to bring inflation to 2%.
Updated projections now show the institution will only reach the target in the first quarter of 2026, a further slide that worries economists. Financial markets are forecasting another 36 basis points of rate cuts this year, meaning one or two more easing interventions.
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