On schedule, the European Central Bank lowered interest rates by 25 basis points, suggesting that the pace of easing may be nearing its end

The European Central Bank (ECB) has cut interest rates for the sixth time since last June, but hinted that the rate-cutting cycle may be nearing its end as inflation cools and the economy digests significant geopolitical changes.

On Thursday, March 6, the ECB announced its latest interest rate decision, cutting rates by 25 basis points as expected, lowering the deposit facility rate from 2.75% to 2.5%, marking the sixth rate cut since last June.

At the same time, the main refinancing rate was lowered from 2.9% to 2.65%, and the marginal lending rate was reduced from 3.15% to 2.9%, all in line with market expectations.

Following the rate cut announcement, traders reduced their expectations for further ECB rate cuts, anticipating an additional 41 basis points cut before the end of the year.

ECB Hints That Rate-Cutting Pace May Be Nearing Its End, Geopolitical Risks May Become New Variables

The ECB stated: Interest rates "are becoming noticeably less restrictive."

In its statement, the ECB noted that the rate cuts have reduced the cost of new borrowing for businesses and households, and loan growth is recovering. However, the resistance to easing financing conditions stems from the impact of past rate hikes on the stock of credit, and overall, lending remains sluggish.

The ECB reiterated that "the anti-inflation process is progressing well," but removed previous wording that indicated it would achieve its inflation target "within this year." Instead, it stated that underlying price data suggests this target will be achieved on a "sustained basis."

The change in the ECB's wording has sparked market speculation that policymakers may be considering pausing rate cuts next month, believing that the 2% inflation target is nearing achievement. This may not be good news for the faltering European economy, which now has to contend with significant spending for military restructuring in addition to U.S. trade tariffs.

However, uncertainty has recently increased, as former President Trump may trigger hundreds of billions of euros in new defense spending for European governments, which will impact inflation, economic expansion, and debt. National leaders will discuss specific details at the upcoming summit.

Additionally, the EU is currently seeking to mobilize around 800 billion euros for military spending, with the incoming German Chancellor pledging to “defend the nation at all costs”.

Analysts believe that if military production capacity can be expanded to meet spending demands, such large-scale spending could boost growth in the eurozone. However, not all of the 20 EU member states have the same fiscal space as Germany, meaning that additional spending could put pressure on already strained budgets and trigger negative reactions in the bond market.

Market Reaction

The euro against the US dollar has short-term surged over 40 points, currently reported at 1.0839.

German government bonds have widened their decline, with the 10-year yield rising by 5 basis points to 2.85%.

Spot gold has short-term dropped by about 6 dollars, currently reported at 2902.48 dollars/ounce.