The European Central Bank (ECB) has implemented its sixth interest rate cut in nine months in an effort to stimulate economic growth across the eurozone.
Despite mounting economic challenges, including the threat of US tariffs and rising military expenditures in Europe, the ECB has remained committed to its strategy of lowering rates. The central bank reduced its main interest rate from 2.75% to 2.5%, while also revising its eurozone economic growth projections downward.
This latest reduction coincides with a broad sell-off of German government bonds, which has impacted other bond markets, including the UK. The sell-off was triggered by Germany’s recent decision to escalate military and infrastructure spending, with political parties negotiating a new government considering relaxed fiscal rules to accommodate a significant rise in debt levels.
As a result, German bonds experienced their most substantial sell-off in years on Wednesday, pushing up borrowing costs. The yield on Germany’s 10-year bonds saw its largest daily surge since May 1997, continuing to rise on Thursday and reaching 2.929%—the highest level since October 2023. This increase has also influenced UK borrowing costs, which were already under pressure due to inflation concerns and delayed expectations for interest rate reductions.
Despite these developments, Lindsay James, an investment strategist at Quilters, noted that market sentiment still anticipates two additional rate cuts from the Bank of England in 2025, citing recent inflation data as a positive indicator.
With inflation edging closer to its 2% target, the ECB emphasized that lower interest rates would help reduce borrowing costs for both businesses and households. However, the central bank revised its eurozone growth forecast for 2025 to just 0.9%, a marginal improvement from last year’s 0.7% expansion.
Looking ahead, the ECB faces considerable challenges in managing inflation while navigating geopolitical and economic uncertainties. One potential risk is the Trump administration’s proposal to introduce “reciprocal tariffs” on nations that impose taxes on US imports, which could further strain the eurozone economy.
