The European Central Bank is widely expected to lower interest rates by another 0.25 percentage points on April 17, as policymakers navigate a deteriorating eurozone growth outlook amid unpredictable global trade tensions.
Recent data and political developments have pushed markets to price in a terminal deposit rate between 1.50% and 1.75% by the end of 2025, down from 2.00% earlier this month. This implies at least three further cuts beyond April. The deposit rate currently stands at 2.50%. Terminal rate refers to the point where a central bank stops cutting or raising rates in the cycle, and usually coincides with inflation being at target.
What Are the Key ECB Interest Rates?
As of March 12, the three ECB key interest rates are:
- Deposit facility rate: 2.50%
- Main refinancing rate: 2.65%
- Marginal lending facility: 2.90%
When Are the Next ECB Meetings in 2025?
- April 17, 2025
- June 5, 2025
- July 24, 2025
- Sept. 11, 2025
- Oct. 30, 2025
- Dec. 18, 2025
Market Turmoil Makes Forecasting Hard
Central bankers face a difficult task, says Peter Goves, global head of developed markets fixed income strategy at MFS Investment Management. “Every yield and fundamental forecasts are out of date very quickly as the prevailing environment is highly fluid.” Over the past two weeks, US President Donald Trump has sent global equity and bond markets on a rolleroller coaster with his shifting tariff policy.
“The news of Trump backing down from tariffs is a big positive for markets, with many saying that the worst case scenario is now off the table. But the overhang of the trade war is likely to persist for some time. Markets have already responded positively to the news, but investors remain weary of increasing tensions with steep tariffs remaining for China,” says Michael Field, Morningstar’s chief European equity market strategist.
AXA had forecast a 1.5% terminal rate at the end of 2025 even before the latest market rout.
“Our forecast was published before the current phase of market turbulence. We are waiting for more clarity and are not revising our forecast at present,” says Alessandro Tentori, CIO Europe at AXA Investment Management.
His outlook includes cuts in April and June, as there is no monetary policy meeting in May, with an additional two 0.25-percentage-point reductions through the second half the year.
“Even though we’re probably entering neutral territory, the ECB will stay cautious given all the risks that could still materialize,” says Ulrike Kastens, senior economist Europe at DWS.
Kastens adds: “At its last meeting in March, the ECB did not even rule out a pause in rate cuts. But now it is being overtaken by the new trade reality. The significant increase in tariffs on European exports to the US and the associated uncertainty have significantly increased the downside risks to the economy in 2025, which the central bank is likely to counter with a further 25 basis point cut in the deposit rate to 2.25%.”
ECB Governing Council Divided on Interest Rates
The ECB’s key decision-making body appears divided on the future policy path: The governor of the French central bank, Francois Villeroy de Galhau, voiced support for rapid interest rate cuts in French media this week. While the tariff dispute will have a significant negative impact on economic growth, the disinflation trend in the eurozone is solid, he says. The appreciation of the euro against the US dollar will also help to contain price pressure, he says.
On the other side of the spectrum, Austria’s central bank governor Robert Holzmann sees no reason to lower rates at this point. “After everything I’ve seen, I don’t see any reason I should change my mind,” he said at a press conference on Tuesday, though he left the door open for a shift if data warranted it.
Minutes from the governing council’s March 6 meeting, published on April 6, confirmed growing divergence within the governing council.
Recent ECB Key Interest Rate Moves
The ECB began its rate-cutting cycle in June, paused in July, and resumed its rate changes in September, October, December, January, and March, bringing down its key rate by 1.5 percentage points in total.
What Do Tariffs Mean for Eurozone Inflation?
While most economists agree that tariffs will negatively impact eurozone growth, their effect on inflation is less clear.
Cheaper goods from China, lower energy prices and a stronger euro versus the dollar are disinflationary, says DWS’s Kastens. “The ECB wage tracker continues to indicate that negotiated wage pressure eases, though services inflation is set to remain elevated throughout 2025,” she says.
Still, tariffs can lead to supply bottlenecks that may push prices higher, according to a paper by the Austrian National Bank.
Inflation in the eurozone increased by 2.2% year over year in March, according to Eurostat’s flash estimate, lower than February’s reading of 2.3%, and in line with forecasts.
DWS forecasts headline inflation at 2.3% in 2025 overall, with a decline toward 2% in the second half the year, which is consistent with the ECB’s medium-term inflation target of 2%.
April 17 ECB Meeting: What to Expect
ECB observers expect the central bank to stay tight-lipped about future rate cuts.
“It is very difficult for central banks to give rigid forward guidance. But what the central banks can do is maintain clear communication on their commitment to price stability and its data-dependent, meeting-by-meeting approach. The ECB has made very clear that it will follow data outlined in the reaction function,” says Peter Goves of MFS.
In mid-March, ECB President Christine Lagarde outlined the ECB’s decision-making framework, structured around three key pillars of the reaction function:
- The inflation outlook
- The dynamics of underlying price and wage pressures
- The transmission of monetary policy
“Although no new growth and inflation projections will be presented at the April meeting, a key question at the press conference is likely to revolve around the impact of tariff policy on inflation,” DWS’s Kastens adds.
“Given the high level of uncertainty, we do not expect any change in the ECB’s communication: data dependency and decisions taken meeting by meeting.”
While updated growth and inflation forecasts are only due in June, any signs of divergence from the ECB’s March outlook will be closely watched. “Negative growth revisions for one are understandably likely to be seen in June projections,” MFS’s Goves says.
Trump Tariffs: A Growth Challenge for the eurozone
Tariffs are widely expected to dampen the eurozone’s growth. In its March forecast, ECB staff already revised down their projections – to 0.9% for 2025, 1.2% for 2026 and 1.3% for 2027. Sentiment indicators such as the Sentix eurozone sentiment index and HCOB eurozone manufacturing PMIs have fallen recently, and economists expect the impact to appear in hard data from May onward.
On Wednesday, UBS downgraded its eurozone growth outlook to 0.5% in 2025 from 0.9% and to 0.8% in 2026 from 1.1%. But higher EU and German fiscal spending is expected to spark a recovery by 2027, the bank says. Germany’s incoming coalition government has agreed on a multi-billion-euro stimulus package, and analysts believe it may benefit disproportionately compared with its eurozone peers.
German Bund Yield Curve Steepens Amid Rate Cuts, Tariff Turmoil
The anticipated rate cuts have pushed down the front-end of the bond yield curve in the eurozone, particularly of German 2-year bonds.
In contrast, longer-dated bund yields have moved higher in recent months, driven by expectations of increased bond issuance after Germany’s announced higher fiscal spending in early March.
“Bunds saw their darkest day in the history of the eurozone on March 5, when the yield on the benchmark 10-year bund shot up by 30 basis points,” says AXA’s Tentori.
“The market’s strong reaction is linked to the fact that Berlin is moving beyond the role of an advocate of orthodox fiscal policy and is using its ample fiscal leeway for structural projects. This could signal a sea change in Europe’s economic conditions.”
Support for the German 10-year bund intensified this week, as trade tension called the safe-haven status of US Treasuries into question and investors bought bunds as safe assets.
How Do Interest Rate Cuts Affect Markets?
Equity markets tend to rise on anticipated rate cuts. In bond markets, falling interest rates mean lower yields, which pushes bond prices higher. Lower rates also make existing bonds, and particularly those already issued during a period of high rates, more attractive for yields.
Meanwhile cash savings rates on bank accounts will likely decrease, to the detriment of savers. The rates that savers receive depend mostly on the deposit facility, which defines the interest banks receive for depositing money with the ECB overnight. Borrowers, by contrast, benefit from lower rates as consumer debt and mortgages become cheaper.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
