ECB Cuts Deposit Rate to 2.5% and Warns Trade War Fears Are Hurting Europe's Economy

The European Central Bank cut interest rates across the 20-member eurozone for the second time in 2025 on 6 March, reducing its benchmark deposit rate by a quarter of a percentage point to 2.5% in line with economist expectations, The Guardian reported. The main refinancing rate was cut to 2.65% and the marginal lending facility rate to 2.90%.

Trade war clouds

The decision came as US President Donald Trump prepared to impose 25% tariffs on all goods imported from the European Union. ECB president Christine Lagarde blamed a "high level of trade and policy uncertainty" for the downgrade in expected growth. "From one day to the other, the situation changes dramatically, and our projections, the measure of underlying inflation, the price of energy, you know, you just name it, risks are all over the place," she told a press conference in Frankfurt.

• Deposit rate cut from 2.75% to 2.5% — sixth reduction in a year
• Main refinancing rate cut to 2.65%
• Marginal lending facility rate cut to 2.90%
• 2025 growth forecast lowered from 1.1% to 0.9%
• 2026 growth forecast lowered from 1.4% to 1.2%
• 2027 growth forecast: 1.3%
• 2025 inflation forecast raised from 2.1% to 2.3% on higher energy prices
• February inflation: 2.4% (down from 2.5% in January); services inflation 3.7%

Defence spending complicates the picture

The ECB is also under pressure to prevent a steep rise in eurozone government borrowing costs after Germany's chancellor-in-waiting Friedrich Merz said his country would "do whatever it takes" to rearm. Merz is keen to lift the debt brake that has constrained German borrowing since the 2008 financial crisis. The European Commission has set out a five-part plan to raise nearly €800 billion for Europe's defence industry, including €150 billion in loans for member states and measures to mobilise private capital.

The announcement sparked a surge in German borrowing costs and a knock-on rise in Italian and French bond yields, putting pressure on Paris and Rome to balance their books.

Analyst view

Mark Wall, chief European economist at Deutsche Bank, said: "The ECB finds itself in a challenging position between the threat of US tariffs in the near-term that could warrant further rate cuts and the growing commitment to higher defence spending over the next several years, which will be required to secure Europe's strategic autonomy." He said the ECB would need "a deft hand on the monetary policy lever" to manage the conflicting pressures. The ECB signalled that its rate had become "meaningfully less restrictive", suggesting further cuts would be modest and possibly delayed until at least the summer.