Ch. Lagarde: After the new interest rate reduction, our policy becomes less restrictive

The European Central Bank (ECB) has reduced its interest rates by 0.25%. As announced by the ECB, the Bank’s Board of Directors decided at its meeting today to cut its interest rates by 0.25%.

Following this, the main interest rate (deposit facility) is set at 2.5%. The decision was made unanimously, however, the governor of the Central Bank of Austria (Robert Holzmann) abstained from voting.

This is the second consecutive reduction in interest rates since the beginning of the year, as the ECB had already cut rates by 0.25% on February 5.

As explained by the ECB President, Christine Lagarde, during a press conference, after this reduction, “our monetary policy is now significantly less restrictive, as our interest rate cuts make borrowing less expensive for businesses and households.” At the same time, there is an increase in loans.

However, the economy faces ongoing challenges, which is reflected in the ECB’s new growth forecasts, lowering the bar for 2025 to 0.9%, 1.2% for 2026, and 1.3% for 2027. The downward revisions compared to the previous December 2024 forecasts for 2025 and 2026 reflect lower exports and the ongoing weakness of investments, partly due to high trade policy uncertainty and broader policy uncertainty.

It is reminded that according to the previous forecasts published by the ECB in December 2024, after an increase of 0.7% in the previous year, GDP was estimated to rise by 1.1% in 2025, by 1.4% in 2026, and by 1.3% in 2027.

Regarding inflation, it was forecasted to decrease to 2.1% in 2025 and further decrease to 1.9% in 2026 and 2.1% in 2027.

Concerning the target set by the ECB for inflation, it is, according to the new forecasts, expected to be achieved in 2026. Specifically, inflation is forecasted to fall to 2.3% in 2025, 1.9% in 2026, and 2.0% in 2027.

However, in response to relevant questions, Christine Lagarde estimated that the increased defense expenditures, which both Germany and the entire EU seem determined to proceed with, may positively impact the real economy, further boosting recovery rates, but are likely to cause inflationary pressures.

Overall, the risks to economic growth remain on the downside. As the ECB head noted, a escalation of trade tensions could reduce eurozone growth through the weakening of exports and the global economy. The ongoing uncertainty about global trade policies could drag down investments. Geopolitical tensions, such as Russia’s unjustified war against Ukraine and the tragic conflict in the Middle East, also remain a significant source of uncertainty.

Additionally, as Christine Lagarde estimated, the increasing frictions in global trade add more uncertainty to the inflation outlook in the eurozone. A general escalation of trade tensions could lead to euro depreciation and increased import costs, which would put upward pressure on inflation. At the same time, lower demand for eurozone exports as a result of higher tariffs and the redirection of eurozone exports from countries with surplus production capacity would put downward pressure on inflation. Geopolitical tensions create bilateral risks for inflation concerning energy markets, consumer confidence, and business investments.

In response to a related question about the frozen Russian assets in the West and whether their confiscation should proceed, Christine Lagarde noted that the “frozen assets” serve as collateral for loans amounting to 50 billion euros that have been granted. In any case, the ECB does not involve itself in making such a decision, but emphasized that any decision taken should take into account International Law rules. (7/3/2025)