European Central Bank President Christine Lagarde just dropped a game-changing signal. She announced a 25 bps cut in the new deposit facility rate to 2.25%. She reiterated that the Governing Council was, in fact, unanimous in its support of this decision. Added to this is the concern that increasing trade frictions might negatively affect the eurozone economy. Lagarde’s message, even with this cut, is that the ECB is still data-dependent and will keep a hawkish focus on economic indicators moving forward.
Lagarde provided a terse account of their rationale for cutting rates. She pointed to the “exceptional uncertainty” resulting from trade tension and tariffs as the main driver for the decision. On that latter front, she noted a worsening trade environment is raising the threat to economic expansion. Nevertheless, the eurozone economy proved resilient in early 2025, with manufacturing activity bottoming out and GDP probably increasing in the first quarter.
Economic Indicators Show Resilience
To that end, she pointed to signs of stabilization in the eurozone’s economic performance. The rate of unemployment decreased to 6.1% in February, the lowest unemployment in the euro’s history. This drop in unemployment is thanks to the domestic inflation giving way, and wages growing more modestly by the day.
Lagarde pointed out that there are “important policy initiatives at the national and EU levels,” including investments in defense and infrastructure, which should bolster manufacturing. This trend is further confirmed by recent survey data, which is great news for the pipeline sector.
“Most indicators of underlying inflation are pointing to a sustained return to our 2% medium-term target.” – Christine Lagarde
Mark Wall from Deutsche Bank observed that ECB hawks have dropped the “restrictive” language while acknowledging the resilience of the economy. While this certainly implies a new dovish tone in monetary policy, policymakers are aware of the conundrums of the current economic space.
A Focus on Flexibility and Agility
Lagarde described the ECB’s approach moving forward with two key words: “readiness” and “agility.” She stressed the need to avoid leaping to a predetermined position. Instead, let’s take a longer view and think about how we adapt to shifting economic circumstances.
The ECB’s decision to cut rates is rooted in a growing confidence regarding the disinflation process towards the 2% target. Lagarde said she was encouraged by progress in stabilizing inflation. She added, “It’s becoming more evident that inflation is going to settle in right around our target.”
She emphasized the importance of monetary policy action. Injecting €800 billion or near to €1 trillion into the economy is no trifling challenge. It’s a cutting edge urge that greatly moves advancement.”
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