On Thursday, March 6, the European Central Bank (ECB) cut interest rates for the sixth time in nine months in an effort to stimulate economic growth in the eurozone. Despite facing various economic challenges such as the threat of U.S. tariffs and plans to increase European military expenditure, the ECB has persisted in its rate-cutting plan.
With the inflation rate gradually approaching the target of 2%, the ECB reduced its key interest rate from 2.75% to 2.5%, marking the lowest level since February 2023. The bank stated that the rate cut would “reduce borrowing costs for businesses and households.”
Following the announcement of the rate cut, the euro rose by 0.4% against the U.S. dollar, reaching $1.083 by the time of reporting. The inflation rate has dropped from its peak of 10.6% in October 2022 to 2.4% in February.
As the ECB faces challenges in reaching its 2% inflation target, uncertainties loom ahead. The eurozone economy could be impacted if the Trump administration continues with its plan for “reciprocal tariffs.” The economic outlook for the eurozone may also be influenced by Friedrich Merz, the German Chancellor-elect, who plans to release billions of euros in loans to increase defense spending and modernize Germany’s infrastructure.
Following the news, long-term German bonds experienced the largest sell-off in years on Wednesday, leading to a surge in the euro to its highest level in nearly four months and a rebound in the stock market. In addition, borrowing costs for the UK government increased after the sell-off of German bonds.
Without considering Merz’s aforementioned plan, the ECB lowered its economic growth forecasts for 2025 for the sixth consecutive time, as well as revising downward the forecasts for 2026 and 2027. It is now projected that the eurozone’s GDP will only grow by 0.9% this year, below the 1.1% forecasted in December last year. The slow GDP growth rate last year was 0.7%.
These developments signal a complex landscape ahead for the eurozone economy as it navigates through both domestic and international challenges in the coming months.