At its second monetary policy meeting of 2025 on March 6, the European Central Bank is widely expected to cut its key interest rate by another 0.25 percentage points to 2.50%, but the future path is more uncertain, after executive board member Isabel Schnabel told the Financial Times that the central bank “should now start to debate a pause or a halt to rate cuts.”
Meanwhile, inflation estimates for February showed a slight slowdown in both headline and core prices.
“Despite oscillating inflation readings, economists are unanimously predicting a 25-basis-point cut by the European Central Bank next week. While well flagged, such a move would still be well received by European equity markets, which we believe are still trading at a small discount to their fair value,” said Michael Field, chief equity market strategist for Europe at Morningstar.
Key ECB Interest Rates
• Deposit facility rate: 2.75%
• Main refinancing rate: 2.90%
• Marginal lending facility: 3.15%
Will the ECB Review the Trajectory of Its Monetary Easing?
According to Goldman Sachs, policymakers agree on the need for further cuts—often to a terminal rate of 2%—but they have different views on pace and timing.
“With a further 25bp cut widely expected next week, investor focus will be on whether the Council amends its existing language that policy is ‘restrictive’,” Goldman Sachs said in a note on Feb. 28th. “While some ECB officials—notably Executive Board member Isabel Schnabel—have suggested that policy should no longer be described as clearly restrictive, we expect that the majority of the Council will prefer an incremental change. We therefore believe that a softening of the language—for example, by saying that policy remains ‘somewhat restrictive’— is more likely.”
Goldman Sachs economists admitted that a pause in April “is possible if disinflation stalls or the activity data surprise notably to the upside.” But they added: “Given our forecast for subdued growth, ongoing core disinflation and the updated estimates for the neutral rate, we continue to think that cuts in both April and June are likely. Our forecast entails one additional cut in July due to our weaker growth forecast amid rising trade tensions for a terminal rate of 1.75%.”
Morningstar’s Field sees risks in Europe, but he adds that “an overheating economy is not high on the list,” adding that “interest rates could fall as low as 2% in 2025. A structurally lower level of interest rates would be a boon for European equities, particularly those exposed to consumer spending.”
Risks to Growth Remain Skewed to the Downside
In their recent comments, ECB officials reiterated that risks to growth remained skewed to the downside, and that disinflation was on track, even though services and wage inflation remained elevated, and US tariffs posed risks to the inflation outlook.
Martin Wolburg, senior economist at Generali Investments, admitted that there is overall agreement that at its March 6 meeting, the ECB will highly likely cut its key rate by another 25 basis points to 2.5%. However, he added that “the discussion at markets and within the Governing Council is shifting toward where the landing rate of this easing cycle will be.”
“Updated inflation projections will likely stay consistent with the view of inflation being on track to reach target again and we see potential for the growth outlook to be revised down,” Wolburg commented to Morningstar on Feb. 25. “While this would support further rate cuts, various GC members have more recently implied that the direction of travel at current key rates has become less clear and warn about too much easing.”
Generali Investments expects that the ECB will stick to its data-driven meeting-by-meeting approach with an ongoing emphasis on uncertainties. “While leaving the door for further rate cuts open, it will likely also communicate that the degree of policy restriction has significantly come down. We continue to look for further rate cuts,” Wolburg added.
The Risk of Stagflation
Eurozone GDP growth fell back to 0% in the fourth quarter compared with the previous quarter, according to preliminary flash estimates published by Eurostat.
“After a few quarters of moderate growth, the eurozone economic recovery has again come to a standstill,” said Bert Colijn, chief economist at ING, after the data release. “We don’t expect [the economy] to come out of it this winter. The first indications for the first quarter are that the economy will hover around stagnation some more. Over the course of this year, we do expect domestic demand to drive some economic growth again.”
Schroders expects stagflation in the eurozone, with “a slight recovery in growth,” and with “inflation remaining high.” In a note on Feb. 20, its economic analysts lowered their growth forecast for 2025 from 1.2% to 1.1%, and expect growth to increase to 1.5% in 2026. Schroders also raised its headline inflation forecast for 2025 from 2.2% to 2.4% on an annual basis, on the back of rising energy and food prices.
No Impact Expected After German Elections
Experts are still assessing the impact of Germany’s election outcome on eurozone financial markets. According to Antonella Manganelli, CEO at Payden & Rygel Italia, while important for political stability, the results are unlikely to change the ECB’s trajectory for the next two meetings. “Similarly, any significant progress in the peace talks between Russia and Ukraine could influence long-term forecasts, but will not change the ECB’s short-term plans,” she explained to Morningstar, adding that the recent comments from ECB officials suggest a “more cautious approach” in the second half of the year. Manganelli expects that interest rates will be around 2% by mid-2025. “This move is supported by the still weak growth outlook and the threat of tariffs from the new US administration.”
How Will 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, 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.
When Are the Next ECB Meetings in 2025?
- March 6, 2025
- April 17, 2025
- June 5, 2025
- July 24, 2025
- Sept. 11, 2025
- Oct. 30, 2025
- Dec. 18, 2025
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
