After the sixth interest rate reduction since summer 2024, the scope of the European Central Bank (ECB) has disappeared. An end to the series already becomes more likely in April. “We have risks everywhere, uncertainty everywhere,” said ECB President Christine Lagarde in Frankfurt.
With Donald Trump, Europe not only threatens trade conflicts, the US President has also turned the world upside down, which results in a massive increase in defense spending. Economists fear the inflation in the euro area.
First, the ECB further reduced the key interest rates in the euro area: the central bank reduces the deposit rate that is important for banks and savers by 0.25 percentage points to 2.5 percent. Lower interest rates help the increasingly weak economy in the euro area because loans tend to be cheaper.
New debt package from Berlin as an inflation driver?
Andreas Bley, chief economist of the Federal Association of the German Volksbanken and Raiffeisenbanken (BVR), demands reluctance from the ECB for further interest steps: “The inflation view has turned at the latest with the CDU/CSU and SPD’s financial policy strike.” The government spending is likely to rise sharply in Germany, but also in the euro area for years.
The Union and the SPD want to loosen the debt brake for defense spending that is anchored in the Basic Law. In addition, a special fund is to be created for the repair of the infrastructure with 500 billion euros. The prospect of enormous new debts is already increasing interest rates on the capital markets, while the ECB wants to press the credit costs for companies actual.
IFO President Clemens Fuest considers the scope to be exhausted for further interest rate reductions: “Rising wages and growing state debt could lead to inflation no longer decreasing, but rather increases again.” And Heiner Herkenhoff, general manager of the BDB banking association, refers to impending customs conflicts with the United States: “The risk that US COTTAL policy will also increase inflation again in the euro area-for example by counter-duties of the European Union.”
Falling interest for savers
For savers, the renewed key interest rate is not good news: If commercial banks receive fewer interest for funds, which they park at the ECB, they usually reduce daily and fixed deposit interest for their customers. On the other hand, the renewed key interest rate should not have any influence on the construction interest, according to experts, the interest rate step is already priced.
The overnight interest rates in Germany have dropped continuously since spring last year. In February, an average of 1.48 percent after 1.56 percent in January brought nationwide in January, as an evaluation of the Verivox comparison portal shows.
The ECB not only reduces the deposit rate, but also the interest rate, to which commercial banks can get fresh money from the central bank, further: instead of 2.9 percent, 2.65 percent interest is due according to the recent decision of the ECB council.
Even less growth in Europe is expected
Despite the growing uncertainty, some economists think that the ECB will replace the deposit interest somewhat by summer to boost the economy. According to the latest ECB forecast, the economy in the euro area 2025 should only grow by 0.9 percent. In December, the central bank had already reduced its prediction to 1.1 percent.
It also speaks for further interest rate cuts that the central bank sees its goal of stable prices within reach. In the medium term 2.0 percent inflation, the ECB sees its main goal of stable prices and thus a stable currency in the euro area. However, the central bank expects inflation to disappear more slowly than recently predicted. Instead of 2.1 percent, the ECB is now expecting a rate of 2.3 percent this year.
In February, consumer prices in the euro area were 2.4 percent above the level of the same month. Previously, the rate had risen to 2.5 percent in January for four months in a row.
Inflation wave broken
It is undisputed, however, that the wave of inflation is broken in the course of the Ukraine War. In the meantime, inflation in the euro area has far from its record high at 10.7 percent in autumn 2022: in 2024 it was 2.4 percent.
German resistance to further interest reductions
Because customs conflicts with the United States could heat the inflation, some central bankers warn of too extensive interest rate cuts. Recently ECB directorate Isabel Schnabel had suggested a discussion about an end to the series of interest rates: “We are approaching the point where we may have to pause or stop at the interest reductions,” said Schnabel of the “Financial Times”. Bundesbank President Joachim Nagel also recently warned “with a view to further interest reductions”.
Time series ECB-Lezinsen ECB decisions 6.3,2025 ECB forecasts for the economic and inflation of the Federal Statistical Office for inflation in Germany Eurostat for inflation in the euro area input statement Lagarde ECB-PK 6.2025
