The European Central Bank cuts interest rates to 3% and paves the way for further cuts

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The European Central Bank cut interest rates by a quarter of a percentage point to 3 percent, while softening its hawkish tone and warning that growth would be weaker than it had previously expected.

The ECB’s cut – the fourth cut in borrowing costs since June – takes the central bank’s key deposit rate to its lowest level since March 2023.

European Central Bank President Christine Lagarde said some interest rate setters had proposed a deeper cut of 50 basis points. But she added that support for the quarter-point move was ultimately “unanimous.”

“The door has been opened more clearly for further cuts,” said Mark Wall, an economist at Deutsche Bank.

The European Central Bank’s cautious shift comes as the euro zone and Germany, its largest economy, grapple with weak growth and the threat of a global trade war after Donald Trump entered the White House.

The reduction came on Thursday at a time when the European Central Bank warned that… Eurozone economy The economy is expected to grow just 1.1 percent in 2025, down from its September estimate of 1.3 percent.

The ECB also lowered its growth forecast for 2026 by one percentage point to 1.4%, and is more pessimistic for 2027, when it expects only 1.3% of GDP growth.

“The element that has changed is downside risks, especially downside risks to growth,” Lagarde said.

She added that Trump’s threats to impose sweeping tariffs of up to 20 percent on all US imports – and impact growth – are “not at the bottom line.”

This could mean that the export-heavy eurozone economy would perform worse than the central bank expects if Trump imposes tariffs after returning to office on January 20.

The euro fell 0.2 percent by late afternoon trading at $1.047.

The European Central Bank has abandoned its commitment to “keep interest rates sufficiently tight for as long as necessary” to bring inflation down in line with its 2 percent target. He instead stressed that “the effects of restrictive monetary policy” will “gradually fade” over time.

“The direction of travel currently is very clear,” Lagarde told reporters.
Which indicates that the European Central Bank will ease interest rates further next year. But she stressed that the “pace” of the cuts would be determined by a meeting-by-meeting approach.

She added that although the job was “far from done” on inflation, interest rate setters now believed they were “on track” to achieve their 2 per cent target “sustainably”.

The bank expects headline inflation to reach 2.1 percent in 2025, 1.9 percent in 2026, and 2.1 percent in 2027.

“The risks are skewed towards the ECB having to do more, not less, to support the economy in 2025,” said Dean Turner, chief eurozone economist at UBS Global Wealth Management.

But he warned: “This is more likely to lead to further cuts later in 2025 rather than bigger moves in the near term.”

Investors expect that European Central Bank The European Central Bank is widely expected to cut interest rates more than the US Federal Reserve next year, given that growth in the euro zone is widely expected to lag behind that of the US.

“Gradual easing is the message,” said Mariano Sena, chief European economist at Barclays.

Traders in swap markets kept their bets largely unchanged after the decision. They widely expect the European Central Bank to make further cuts of a quarter of a percentage point by next September, which will raise the deposit rate to 1.75 percent.

“If incoming economic data were to weaken further, for example due to growing doubts about trade tariffs… then a deeper cut would be possible,” said Derek Halfpenny, head of research at MUFG.

Swaps markets are pricing in cuts of about 0.75 percentage points from the US Federal Reserve over the same time period, which would lower the target range to between 3.75 and 4 percent.

Earlier in the day, the Swiss National Bank halved its key interest rate to 0.5 percent, a larger cut than expected.