ECB reduces key interest rate to 2.5 percent

The European Central Bank has reduced interest rates for the sixth time in a row. As expected, the deposit rate important for savers drops to 2.5 percent.

The European Central Bank (ECB) has reduced the key interest rates as expected. At today's meeting in Frankfurt, the central bank's council decided to capture the directional deposit interest from 2.75 to 2.50 percent. For this interest, financial institutions parked excess funds at the central bank. The interest rate was expected. It is the sixth interest rate in a row since the ECB has been reduced for the first time in June 2024 since the wave of inflation. In September, October, December and January, further steps took place.

How it goes on is not yet cleared

“The monetary policy becomes noticeably less restrictive,” said ECB boss Christine Lagarde after the interest decision. The previous interest reductions led to the recording of new loans for companies and private households cheaper and that credit growth attracts. However, the ECB council restricted: The loosening of the financing conditions is slowed down by “that earlier interest rate increases still affect the loan”. Overall, lending will remain damped.

Lagarde did not want to commit to another interest -cut path. The council must be “vigilant” and decide on the basis of the data, she said. “The environment in which we are currently in ourselves is characterized by uncertainties.” The ECB boss called increasing trade disputes and geopolitical tensions as reasons for this.

“Don't get the gas anymore”

According to ZEW economist Friedrich Heinemann, “no way around” led the renewed reduction. Because: “In view of the poor economic situation, the further escalation in the trade war and still optimistic inflation forecasts, the arguments for further normalization of interest levels.”

However, since normalization with this step has now progressed well. “The ECB must now be very careful that, as has already been clearly recognizable in pandemic, it is not clear in pandemic.

Silke Tober also concludes from the IMK Institute: “Today's reduction in the key interest rate to 2.5 percent is a further step in the right direction. Further loosening steps should follow because the economy is paralyzed, the uncertainty is high and the inflation rate should be two percent in the coming months.”

GDP forecasts lowered

At the same time as interest rates, currency keepers lowered their expectations of future economic growth in the euro area for 2025 to 0.9 percent (previously 1.1 percent), for 2026 to 1.2 percent (previously 1.4 percent). The expectations for 2027 remain unchanged at 1.3 percent. For this year you still expect an inflation of 1.9 percent.

Inflation recently more persistent than expected

The main goal of the ECB is to ensure stable prices. Recently, however, the inflation rate in the euro zone had dropped less than expected from economists: from 2.5 percent in January to 2.4 percent in February. On average, economists forecasted a decline to 2.3 percent. Previously, the inflation rate had increased four months in a row.

According to economists, the recently weakening economy also spoke for a further interest rate reduction. At the same time, tensions between Europe and the USA are dampening the hopes of economic recovery on questions of security and trade policy.

The United States hired its support for Ukraine this week. Customs were levied against Mexico, Canada and China and partly suspended again. The European Union also threatens higher tariffs. On the other hand, the additional expenditure for infrastructure and armor planned in the EU and especially in Germany could support the economy in the medium term and drive inflation.

Germany plans Billion-dollar investments with debt

In Germany, the Union and the SPD told the first explorations for the formation of a black and red federal government on Tuesday evening that they wanted to set up a 500 billion euro guilt for modernizing the infrastructure. In addition, the debt brake is to be relaxed in order to be able to put more money in defense. Thirdly, the debt brake should be changed so that the federal states can also take additional loans.

The Basic Law must be changed for all three projects. This requires two-thirds majorities in the Bundestag and the Federal Council. The Bundestag will be discussed for the first time in the old composition on March 13th. The necessary changes to the Basic Law in another special meeting on March 18, as the Reuters news agency from parliamentary circles learned.

Lagarde evaluated projects positively

Christine Lagarde sees a possible growth engine for the economy of the euro zone, as planned in Germany. An increase in defense and infrastructure expenditure could “contribute to growth,” she said.

At the same time, however, the increasing expenditure could also heat inflation again. Lagarde emphasized that the plans of the EU Commission and the possible new government in Germany are currently “work in progress”. What effects you will actually have on inflation and economic growth is currently open. In principle, however, the ECB council agreed that large investment packages will trigger a “growth thrust”.