ECB cuts interest rates by 25 basis points as disinflation takes hold

The European Central Bank (ECB) has officially lowered its three key interest rates by 25 basis points, signalling a shift in its monetary policy stance amid growing economic uncertainty and a strengthening disinflationary trend across the euro area.

Effective from 23rd April 2025, the ECB’s new rates will be:

• Deposit facility rate: 2.25 per cent
• Main refinancing operations rate: 2.40 per cent
• Marginal lending facility rate: 2.65 per cent

The decision, announced following the ECB Governing Council’s latest meeting, is rooted in an updated assessment of inflation, the trajectory of underlying price pressures, and the overall effectiveness of monetary policy transmission.

Disinflation on track

Inflation, both headline and core, continued its downward path in March, aligning with ECB staff projections. A notable easing in services inflation – historically one of the more persistent components – further supports the view that price pressures are stabilising.

“Most measures of underlying inflation suggest that inflation will settle at around the Governing Council’s two per cent medium-term target on a sustained basis,” the ECB stated in its press release.

Moreover, while wage growth remains relatively elevated, it is moderating, and corporate profits are reportedly absorbing some of the cost pressures, thereby limiting their pass-through to prices.

Trade tensions cast a shadow on growth

Despite progress on inflation, the economic outlook for the eurozone has grown increasingly uncertain. Rising global trade tensions – particularly between the EU and the United States – have begun to take a toll on investor confidence and financial markets.

Last month, ECB President Christine Lagarde warned that a potential 25 per cent US tariff on EU goods, along with retaliatory measures by the bloc, could shave 0.5 percentage points off euro area GDP growth. However, economists caution that even this may be too optimistic.

In recent weeks, the euro has appreciated by nine per cent on a trade-weighted basis, energy prices have dropped, and slowing growth in China raises the risk of excess industrial output flooding European markets.

As a result, some investment banks, including HSBC, have revised their inflation forecasts downward, now projecting eurozone inflation to average 1.9 per cent in 2025 and 1.8 per cent in 2026, just below the ECB’s target.

A cautious, data-driven approach

Despite today’s rate cut, the ECB stopped short of committing to a particular path for future moves, emphasising instead its data-dependent and meeting-by-meeting strategy.

“In current conditions of exceptional uncertainty,” the ECB noted, “interest rate decisions will be based on an ongoing assessment of the inflation outlook, economic and financial data, and the strength of monetary policy transmission.”

This caution reflects the complex balancing act the ECB now faces: Ensuring inflation remains anchored around two per cent without further undermining a fragile economic recovery.