ECB cuts interest rates by 0.25% as views diverge on future path for borrowing costs
ECB President Christine Lagarde. Photographer: Alex Kraus/Bloomberg
The European Central Bank cut interest rates by 0.25% on Thursday, though an uncertain economic backdrop is sowing divisions over the correct path for future borrowing costs.
It was the ECB's sixth cut to rates since June last year, with markets expecting one or two more by the end of 2025, largely driven by arguments that the battle against surging inflation has been largely defeated.
The latest decision will bring the lender's key interest rate to 2.5% as it continues its easing cycle amid what policymakers warn will likely be a year of heightened volatility.
Most recent figures from Eurostat show inflation has fallen significantly from its 2022 high, with estimated price levels in the euro area falling in February to 2.4%, just slightly ahead of the ECB's target of 2%.
"The disinflation process is well on track," the ECB President Christine Lagarde said on Thursday.
"Inflation has continued to develop broadly as staff expected, and the latest projections closely align with the previous inflation outlook."
Mr Lagarde added that: "Our monetary policy is becoming meaningfully less restrictive, as our interest rate cuts are making new borrowing less expensive for firms and households and loan growth is picking up.
"At the same time, a headwind to the easing of financing conditions comes from past interest rate hikes still transmitting to the stock of credit, and lending remains subdued overall.
"The economy faces continued challenges and staff have again marked down their growth projections – to 0.9% for 2025, 1.2% for 2026 and 1.3% for 2027.
The ECB's announcement is welcome news for the 126,000 tracker mortgage holders in Ireland, says Michael Dowling of Dowling Financial, with this cohort set to see their repayments fall by €13 per month for every €100,000 owed.
"The cumulative effect of all these decreases has seen repayments fall by €85 pm for every €100,000 owed," Mr Dowling told the
"I expect further falls of 0.75% this year which will be passed immediately to tracker mortgage holders."
However, Mr Dowling continued: "Regretfully, I do not expect variable rates to fall and the fixed rate options have priced in future falls in interest rates."
There are currently around 112,000 mortgage holders in Ireland on a variable rate.
"However, there is scope for banks to reduce fixed rates to 3% for 3- and 5-year fixed rates customers without impacting on the very significant profit margins made on mortgage business by Irish banks," Mr Dowling continued.
"You only have to look at the profits announced by AIB, Bank of Ireland and PTSB in the last week to confirm this fact."
The impact of Thursday's cuts is likely to be mixed, with the full effect largely dependent on how lenders respond and on the supply of housing, says Ross Lynch, Senior Mortgage Advisor at NFP Ireland.
"For prospective buyers, lower interest rates should improve affordability by reducing monthly mortgage repayments and increasing borrowing capacity. This will be particularly beneficial for first-time buyers who have been struggling with rising property prices," says Mr Lynch.
"However, the downside is that cheaper borrowing could further fuel competition in an already supply-constrained market, driving prices higher and making homeownership even more challenging in the long run.
"The core issue remains the severe shortage of housing. Unless supply improves, lower rates will only intensify the affordability squeeze."
Looking forward, Daragh Cassidy of Bonkers.ie said the outlook is now less clear.
While there’s been little major disagreement over the monetary loosening to date, views are starting to diverge on whether inflation is in more danger of over- or undershooting, and how much support should be offered to the region’s misfiring economy.
"I think the ECB might pause its rate-cutting cycle in April," Mr Cassidy told the
"But we’re almost guaranteed at least another one or two cuts before the end of the year, which would take the ECB’s main policy rate down to 2%, half what it was as recently as last June.
However, its not all good news, warns Mr Cassidy.
"There are losers to falling interest rates as well. For example, savers will see their rates fall further. Already since the start of the year AIB, Bank of Ireland, Bunq and N26 have cut their savings and deposit rates. And more cuts are likely after today's meeting."
Complicating the ECB’s rate cut journey is the rapidly shifting geopolitical environment, with US President Donald Trump’s escalating trade war and the knock-on effects of his decision to recalibrate US security alliances among the main challenges for policymakers.
While tariffs are generally seen as negative for Europe’s economic outlook, the implications for inflation are less clear.
