European Central Bank Lowers Interest Rates Again, Euro Strengthens

LONDON (Reuters) -The European Central Bank cut interest rates as expected on Thursday and kept the door ajar to more, even as a looming trade war with the U.S. and plans to boost military spending drive Europe's biggest economic policy upheaval in decades.

The euro extended its gains and was last up 0.28% at $1.082, having traded at $1.0797 earlier, while government bond yields edged up.

Germany's two-year bond yield traded at 2.25%, versus 2.22% just before the decision, while Italian bond yields edged up. European stocks were last down 0.6%.

The euro and European bond yields have surged this week on strong signals that Germany is readying to ramp up spending on defence and infrastructure.

The ECB also cut its economic growth expectations for the euro zone once more and raised its projection for inflation this year, even as it predicted price growth back at target in 2026.

COMMENTS:

THIERRY WIZMAN, GLOBAL FX & RATES STRATEGIST, MACQUARIE, NEW YORK:

"Tighter ECB monetary policy can help strengthen the euro further, but we see monetary policy reacting to the fiscal outlook increasingly. Indeed, fiscal policy divergence between the US and Europe, rather than monetary policy divergence, may become the narrative that drives the euro."

SIMON DANGOOR, HEAD OF FIXED INCOME MACRO STRATEGIES, GOLDMAN SACHS ASSET MANAGEMENT, LONDON:

"Investors need to consider the higher uncertainty about the near-term outlook for the ECB. We hold lower conviction on European front-end rates, given the lack of a clear directional skew, and we prefer steepeners given the additional issuance to finance fiscal expansion in Germany and likely a higher term premium resulting from an improved medium-term growth and inflationary outlook."

DEAN TURNER, CHIEF EUROZONE ECONOMIST, UBS GLOBAL WEALTH MANAGEMENT, LONDON:

"The press release suggests that policymakers prefer to continue with a meeting-by-meeting approach to setting policy, while acknowledging that policy is becoming meaningfully less restrictive."

"In our view, the ECB is likely to continue cutting rates at a steady 25 bps per meeting until it reaches 2% in June, but the risks around this call are balanced."

"While the impact of fiscal spending may take time to filter through to the economy, a positive boost to sentiment, which could be lifted further if there is a ceasefire in Ukraine, could see spending and investment rise in the coming months."

LINDSAY JAMES, INVESTMENT STRATEGIST, QUILTER, LONDON:

"Today's cut in interest rates by the European Central Bank will most definitely be based on the facts and data prior to events of the last week."

"Despite recent events, the European economy still needs supporting and as such the market is still pricing in almost two further rate cuts in 2025, with recent inflation data reasonably encouraging."

"However, investors will be listening carefully to any comments from the ECB on the expected impact of German spending plans that amount to around 900 billion euros."

"The ECB is likely to be fairly cautious of treading such new ground and higher interest rates may prevail as a result."

ARNE PETIMEZAS, DIRECTOR RESEARCH, AFS GROUP, AMSTERDAM:

"Not much to go on in the statement. ECB now dubs the policy stance as 'meaningfully less restrictive' instead of 'restrictive'."

"Nitpicking here, but I had expected all the restrictive language to go. Translated to normal people, new language is akin to keeping the door open to another cut in April. No surprise actually as no one expected them to foreclose on April anyway. Elsewhere, the ECB makes reference to the geopolitical uncertainty - the Trump-Zelensky spat and its fallout. From the press conference we hopefully learn what Lagarde & Co exactly mean."

MARK WALL, CHIEF EUROPEAN ECONOMIST, DEUTSCHE BANK, LONDON:

"The ECB finds itself in a challenging position between the threat of U.S. tariffs in the near-term that could warrant further policy rate cuts — and a move into stimulative territory – and the growing commitment to higher defence spending over the next several years which will be required to secure Europe’s strategic autonomy. This environment requires a deft hand on the monetary policy lever and the preservation of policy optionality."

MARCHEL ALEXANDROVICH, EUROPEAN ECONOMIST, SALTMARSH ECONOMICS, LONDON:

"The ECB revised down its GDP growth projections for 2025 and 2026 and cut interest rates."

"However, higher energy prices are pushing the ECB’s inflation forecasts higher for 2025. In response, the Governing Council adjusted its language on the restrictiveness of monetary policy, stressing the data-dependent nature of its future policy response."

SYLVAIN BROYER, CHIEF EMEA ECONOMIST, S&P GLOBAL RATINGS:

"Will the March decision be the last rate cut in this ECB cycle? No one can say for sure, but it's not impossible. Upside risks to inflation remain, especially via wages, and if you look at the bank lending survey, the flow of new loans or the breakdown of money growth, the empirical evidence suggests that ECB rates are already no longer constraining demand. Perhaps the neutral rate is simply higher than many believe.

"How Europe will finance its defence efforts - should it be more by using the headroom in the EU budget and leveraging private savings through the EIB balance sheet, rather than by relaxing EU fiscal rules to allow governments to run higher deficits - is also important to the ECB. All these are reasons why we could see the ECB pause at its next meeting in mid-April before getting more clarity."

PATRICK O'DONNELL, SENIOR INVESTMENT STRATEGIST, OMNIS INVESTMENTS:

"The real risk for today will be in the Q&A. President Lagarde will inevitably be asked about the German fiscal package that is in the works. Whilst there may be some implementation risks, given the magnitude of what as been announced, it will be very difficult to offer a dovish interpretation."

YAEL SELFIN, CHIEF ECONOMIST, KPMG:

"Today’s decision comes amidst a significant increase in economic uncertainty, which could pose a risk to the medium-term inflation outlook. Governments across Europe have signalled their intention to loosen fiscal policy, with Germany announcing a substantial spending package for both defence and infrastructure. While this is expected to boost growth prospects in the medium term, it could potentially lead to a rebound in inflationary pressures. The prospects of trade tariffs imposed on Europe and its trading partners accentuate the upside risk."

(Reporting by the Reuters Markets Team, Compiled by Dhara Ranasinghe; Editing by Amanda Cooper)