ECB lowers key interest rates as inflation outlook improves

The Governing Council of the European Central Bank (ECB) has decided to lower the three key ECB interest rates by 25 basis points on Thursday (yesterday).

This includes a reduction in the deposit facility rate, which is the main tool used by the Governing Council to guide its monetary policy stance. The decision follows an updated assessment of the inflation outlook, underlying inflation trends, and the ongoing transmission of monetary policy.

The process of bringing down inflation is progressing well. Inflation has continued to develop largely as expected, and the latest projections are closely in line with previous forecasts. ECB staff now expect headline inflation to average 2.3 per cent in 2025, 1.9 per cent in 2026, and two per cent in 2027. The upward revision for 2025 is largely due to stronger energy price developments. When excluding energy and food, inflation is forecast to average 2.2 per cent in 2025, 2.0 per cent in 2026, and 1.9 per cent in 2027.

Most indicators of underlying inflation suggest that inflation will gradually settle around the Governing Council’s medium-term target of two per cent. However, domestic inflation remains high, mainly because wages and prices in certain sectors are still adjusting to past inflation increases with some delay. That said, wage growth is slowing as expected, and business profits are helping to absorb some of the pressure on prices.

Monetary policy is becoming less restrictive, with lower interest rates making new borrowing more affordable for both businesses and households, which is supporting loan growth. However, financing conditions remain under pressure from the impact of previous rate hikes, which are still being felt across existing loans, meaning overall lending activity remains subdued.

The economy continues to face challenges, and ECB staff have once again downgraded their economic growth forecasts. They now project growth of 0.9 per cent in 2025, 1.2 per cent in 2026, and 1.3 per cent in 2027. The lower growth expectations for 2025 and 2026 mainly reflect weaker exports and continued softness in investment, which is partly driven by heightened uncertainty in trade policy and broader economic policymaking. Rising real incomes and the gradual fading of past interest rate increases are expected to support demand in the coming years.

The Governing Council remains firmly committed to ensuring that inflation stabilises sustainably at its medium-term target of two per cent. In light of rising uncertainty, it will continue to follow a data-driven approach, reviewing the appropriate monetary policy stance on a meeting-by-meeting basis. Interest rate decisions will be based on the latest assessment of the inflation outlook, incoming economic and financial data, underlying inflation dynamics, and the strength of monetary policy transmission. The Governing Council is not committing to any specific future path for interest rates.

Key ECB interest rates

The Governing Council decided Thursday to lower the three key ECB interest rates by 25 basis points.

As a result, from 12 March 2025, the rates will be:

• Deposit facility rate: 2.50 per cent
• Main refinancing operations rate: 2.65 per cent
• Marginal lending facility rate: 2.90 per cent

Moreover, the APP and PEPP portfolios are continuing to decline at a measured and predictable pace, as the Eurosystem is no longer reinvesting principal payments from maturing securities.