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. A decade and a half of strict fiscal constraint in Germany is being broken as the country’s next government is planning to ease borrowing rules to allow more spending on defense and infrastructure.
On Thursday, Christine Lagarde, the president of the central bank, emphasized the whirlwind pace of economic and political change taking place in Europe.
“We have not been spared recent developments in the last few hours and days,” she said at a news conference in Frankfurt.
Ms. Lagarde said that policymakers would be “attentive” and “vigilant” to those spending plans to determine the effect on inflation. But she added that officials at the bank expect the additional spending to add to economic growth. She added that policymakers were keenly following developments in Brussels on Thursday, as European leaders gather to negotiate defense plans.
The plans, which include more borrowing, 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 have 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.
“We have risks all over; uncertainty all over,” Ms. Lagarde said.
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 know that the rate had been reached only 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.
But Ms. Lagarde said that the central bank would not commit in advance to the next phase for interest rates. Instead, the data at each policy meeting would determine whether to cut or pause.
Giving firmer indications would “not be very responsible,” Ms. Lagarde said. “From one day to the other, the situation changes dramatically.”
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 predicted 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, from 2.5 percent the month before. Inflation in the services sector, which has been frustratingly stubborn for policymakers, also slowed to 3.7 percent, from 3.9 percent in January. The bank forecast inflation would reach the 2 percent target in early 2026, slightly later than previously forecast because of higher energy prices.
