The European Central Bank lowered interest rates on Thursday, the sixth consecutive cut, as the economic landscape for the region rapidly changes.
The bank’s key rate was cut by a quarter point to 2.5 percent, which was widely expected as inflation in the region has stayed relatively low and economic growth has been weak.
But the future path of interest rates has become increasingly uncertain as policymakers face a seismic shift in Europe. In the past few days, European leaders have vowed to increase military spending by hundreds of billions of euros as they are no longer sure of their alliances with the United States.
The plans, which include borrowing more, notably in Germany, have led to yields on European government bonds jumping higher, particularly on long-dated debt, and rising borrowing costs. The prospects of more spending combined with lower interest rates has helped to push stocks up, with Germany’s benchmark index, the DAX, at a record high. And the euro is also rallying against the U.S. dollar to its strongest level in four months, further easing inflationary pressures.
This has reshaped the fiscal picture in Europe at a time when the central bank was grappling with the prospect of President Trump imposing tariffs on the region.
There has been division among the members of the European Central Bank’s Governing Council about how much lower interest rates need to go. Overall, policymakers have signaled that they were aiming for a neutral rate, where policy would neither restrict nor boost the economy. But they said they would only know that the rate had been reached when they were at it.
On Thursday, the central bank said monetary policy was “becoming meaningfully less restrictive,” a sign that policymakers are drawing closer to pausing interest rate cuts.
With yields rising, traders are signaling that there will be just one more rate cut, potentially in April or June.
The eurozone economy has been sluggish since late last year, and policymakers have substantially cut interest rates — lowering them by 1.5 percentage points since last summer — to support businesses and households with easier access to loans. The extent of economic weakness has taken policymakers by surprise as consumers have been slow to spend more in response to lower inflation. But the central bank is still forecasting the economy will pick up later this year.
Still, the central bank forecast slightly slower growth than it did three months ago, anticipating lower exports and weak investment as businesses contend with uncertainty over trade policy. The eurozone economy is now forecast to grow 0.9 percent this year and 1.2 percent next year.
Inflation in the eurozone slowed to 2.4 percent in February, data published earlier this week showed. Inflation in the services sector, which has been frustratingly stubborn for policymakers, also slowed to 3.7 percent, from 3.9 percent in January.
