“As expected, the European Central Bank (ECB) cut rates by 25bps to 2.5% this afternoon. (19th March 2025)
Looking ahead, we expect the ECB to reduce rates to a neutral-looking 2% over this year. The ECB’s revised policy statement describes the current stance as “becoming meaningfully less restrictive”, indicating that the Governing Council might see some upside risk to that forecast.
Meanwhile, EU leaders are discussing ways to finance increased defence spending at a summit in Brussels today.
The possibility of significantly increased European deficit spending has prompted markets to price fewer rate cuts in recent days, while the long end of the curve has sold off even more sharply.
We think fiscal stimulus could boost growth by 0.5-1.0% in Germany and by 0.2-0.7% in the Eurozone as a whole.
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However, any tailwinds might come too late to stop the French economy falling into a technical recession. Following France’s Q4 0.1% GDP contraction, the high-frequency activity dataflow has been weak, with registered unemployment, PMI, and industrial production indicators now all flashing red.
In addition, the tailwind to growth from fiscal stimulus in Europe is likely to be at least partly offset by the US’ imposition of sectoral tariffs.
In sum, we continue to expect the ECB to take rates to neutral in relatively short order. But risks to this forecast – in both directions – are building. Weak near-term activity data and US tariffs could see the ECB cut more aggressively, but front-loaded fiscal easing could mean rates stay higher for longer.”
