Europe: European Central Bank Prepares for Terminal Rate Landing
2025-03-10
■ The European Central Bank (ECB) has decided to cut interest rates by 0.25% and revised its policy statement to signal adjustments in its policy trajectory.
■ A shift toward a "dovish pause" is possible, halting further rate cuts while retaining flexibility to address uncertainties.
At its meeting on the 6th, the ECB decided to lower the target range for its three key policy rates, including the deposit facility rate (DFR), by 0.25%, setting the new target range (interest rate corridor) at 2.50%-2.90%. The statement noted, "As previous rate cuts have reduced borrowing costs for businesses and households, leading to increased lending, monetary policy is gradually moving away from significantly restrictive levels." This reflects a revision of the ECB's previous stance on the restrictiveness of its monetary policy.
The updated staff macroeconomic projections show a downward revision to the real GDP growth rates for 2025 and 2026, while the 2025 Harmonized Index of Consumer Prices (HICP) inflation forecast has been raised. Due primarily to energy-related factors, the timeline for inflation to return to the 2% target has been pushed back from the second quarter of 2025 (as projected in December last year) to the first quarter of 2026. The projections incorporate tariff measures effective as of February 19 but do not account for the potential impact of tariffs recently announced by the U.S. against the European Union (EU).
At the post-meeting press conference, ECB President Christine Lagarde stated that risks to economic growth remain tilted to the downside, while acknowledging both upside and downside risks to price stability. She highlighted the current high level of uncertainty and avoided using previous rhetoric that hinted at continued rate cuts, such as "we know the direction we are heading." Regarding ongoing developments, such as U.S. tariff measures and Germany's increased defense spending plans, the ECB indicated it would continue to monitor and assess their impacts gradually. Due to heightened uncertainty since February, questions about the natural rate of interest and related comments from President Lagarde were not addressed.
At the previous ECB meeting on January 30, it was noted that if policy rates approached neutral levels, further rate cuts would require more cautious evaluation in terms of magnitude and pace. This latest decision aligns with that perspective. Although the timeline for achieving the 2% inflation target has been delayed by about six months, inflation control is progressing as expected, reducing the immediate need for further rate cuts to ensure price stability.
Moving forward, monetary policy will be guided by uncertainties in the economic and inflation outlook. The ECB will retain the option for further rate cuts while pausing them if economic and price developments align with expectations, adopting a "dovish pause" stance. It will also closely monitor external factors, such as U.S. tariff measures. With policy rates nearing neutral levels, the ECB is gradually adjusting its approach, preparing for the landing of the terminal rate (the ultimate goal of rate cuts) in an environment of limited visibility.
■ A shift toward a "dovish pause" is possible, halting further rate cuts while retaining flexibility to address uncertainties.
At its meeting on the 6th, the ECB decided to lower the target range for its three key policy rates, including the deposit facility rate (DFR), by 0.25%, setting the new target range (interest rate corridor) at 2.50%-2.90%. The statement noted, "As previous rate cuts have reduced borrowing costs for businesses and households, leading to increased lending, monetary policy is gradually moving away from significantly restrictive levels." This reflects a revision of the ECB's previous stance on the restrictiveness of its monetary policy.
The updated staff macroeconomic projections show a downward revision to the real GDP growth rates for 2025 and 2026, while the 2025 Harmonized Index of Consumer Prices (HICP) inflation forecast has been raised. Due primarily to energy-related factors, the timeline for inflation to return to the 2% target has been pushed back from the second quarter of 2025 (as projected in December last year) to the first quarter of 2026. The projections incorporate tariff measures effective as of February 19 but do not account for the potential impact of tariffs recently announced by the U.S. against the European Union (EU).
At the post-meeting press conference, ECB President Christine Lagarde stated that risks to economic growth remain tilted to the downside, while acknowledging both upside and downside risks to price stability. She highlighted the current high level of uncertainty and avoided using previous rhetoric that hinted at continued rate cuts, such as "we know the direction we are heading." Regarding ongoing developments, such as U.S. tariff measures and Germany's increased defense spending plans, the ECB indicated it would continue to monitor and assess their impacts gradually. Due to heightened uncertainty since February, questions about the natural rate of interest and related comments from President Lagarde were not addressed.
At the previous ECB meeting on January 30, it was noted that if policy rates approached neutral levels, further rate cuts would require more cautious evaluation in terms of magnitude and pace. This latest decision aligns with that perspective. Although the timeline for achieving the 2% inflation target has been delayed by about six months, inflation control is progressing as expected, reducing the immediate need for further rate cuts to ensure price stability.
Moving forward, monetary policy will be guided by uncertainties in the economic and inflation outlook. The ECB will retain the option for further rate cuts while pausing them if economic and price developments align with expectations, adopting a "dovish pause" stance. It will also closely monitor external factors, such as U.S. tariff measures. With policy rates nearing neutral levels, the ECB is gradually adjusting its approach, preparing for the landing of the terminal rate (the ultimate goal of rate cuts) in an environment of limited visibility.