ECB cuts interest rate to 2.5%

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The European Central Bank has cut its benchmark interest rate by a quarter-point to 2.5 per cent, amid signs that inflation is returning to its 2 per cent goal in a lacklustre Eurozone recovery.

The widely expected move is the sixth reduction in the ECB’s deposit rate since the central bank started to lower borrowing costs last June, when it stood at a record high of 4 per cent to counter surging inflation.

The rate is now at its lowest since February 2023.

Traders are expecting one or two further quarter-point reductions this year, according to levels implied by swaps markets.

The euro rose against the dollar after the ECB decision, up 0.3 per cent at $1.082.

Inflation has fallen from a peak of 10.6 per cent in October 2022 to 2.4 per cent in February.

The prospects for the Eurozone economy could also be affected by moves by Friedrich Merz, Germany’s chancellor-in-waiting, to unleash hundreds of billions of euros in borrowing to boost defence spending and overhaul his country’s infrastructure.

Some analysts forecast that the plans could double Germany’s expected growth next year to 2 per cent.

In projections that did not take into account Merz’s announcement this week, the ECB cut its growth forecast for 2025 — its sixth successive downgrade for the year — as well as for 2026 and 2027.

It now expects Euro area GDP to increase by only 0.9 per cent this year, compared with its December projection of 1.1 per cent. Growth last year was a sluggish 0.7 per cent.

This is a developing story