ECB cuts interest rates again: Will inflation return?

On March 6, 2025, the European Central Bank (ECB) cut the key interest rate for the sixth time in order to stimulate the economy in the Eurozone. The interest rate cut by a quarter of a percentage point leads to a new interest rate of 2.5 percent for major banks. This measure is part of a series of interest rate cuts that have been made regularly for nine months, as tagesschau.de reported.

The banks had prepared for this interest rate cut in advance. An overview from FMH shows that fixed deposit interest rates are currently around 2 percent, while loan interest rates for real estate vary between 3.5 and 4 percent. The lower interest rates should lead to more borrowing and an increasing money supply. Nevertheless, an increasing money supply could cause inflationary tendencies, especially if the supply of goods and services remains constant.

Inflation and economic uncertainties

The ECB is aiming for an inflation rate of 2 percent. The inflation rate is currently 1.7 percent through September 2024 and rose to 2.5 percent in January 2025 before falling to 2.4 percent in February 2025. There are different interests within the ECB: German representatives argue for caution in further interest rate cuts, while representatives from southern European countries and France take a more risk-on attitude. This division in Europe is influenced by different economic structures, with Germany being highly concerned about inflation, which stems from historical experience.

The economic situation in Europe, especially in Germany, shows weak growth. External factors such as the Ukraine war, sanctions against Russia and conflicts with China have led to rising raw material and energy prices. The planned rearmament of European countries could promote growth and employment in the short term, but lead to high national debt in the long term. The low interest rates also make it easier for states to take out loans for armaments programs, such as nzz.ch noted.

At the same time, inflation in the euro zone remains high while the economy weakens. ECB President Christine Lagarde continues to cut interest rates, and since June 2023, interest rates have been cut in six steps by a total of 1.5 percentage points. The ECB expects overall inflation to reach 2.3 percent in 2023 and 2.0 percent in 2027. Given the current situation, the discussion about future key interest rates has begun in the ECB, with monetary policy being classified as “noticeably less restrictive”.