Projected ECB Interest Rates in 5 Years: Another Cut for Lagarde but GDP Growth Will Be Weak

Key Takeaways

• The European Central Bank reduced interest rates in March.
• This marks the second rate cut in 2025 after the four reductions in 2024.
• The next monetary policy decision is scheduled for April 17, 2025.

At its March meeting, the European Central Bank reduced interest rates by 25 basis points as inflation trends closer to its 2% target while economic growth weakens.

This marks the bank’s fifth consecutive rate cut, aligning with expectations and following a similar adjustment in January.

Another Cut for Lagarde & Co.

With the latest 25 basis point reduction, interest rates for the deposit facility are 2.50%, 2.65% for main refinancing operations, and 2.90% for the marginal lending facility.

The ECB stated that the disinflation process is “well on track” and noted that monetary policy is becoming significantly less restrictive. “Lower interest rates are making borrowing more affordable for businesses and households, leading to a pickup in loan growth,” the central bank said.

Earlier, the ECB had characterized its policy stance as “restrictive.”

Chief European Strategist at BCA Research, Mathieu Savary said, “By describing policy as ‘meaningfully less restrictive,’ the ECB acknowledges improving domestic conditions—and, crucially, that fiscal easing is pushing the neutral rate higher.”

“As a result, the likelihood of the deposit rate falling below 2% has significantly diminished,” he added.

ECB Sees Weaker Economic Growth Ahead

The ECB noted that the eurozone economy continues to face challenges, prompting its staff to lower growth projections to 0.9% in 2025, 1.2% in 2026, and 1.3% in 2027.

The ECB explained that the downward adjustments for 2025 and 2026 are largely attributed to weaker exports and sluggish investment, influenced in part by heightened uncertainty surrounding trade and broader economic policies.

Looking ahead, the central bank emphasized a “data-dependent and meeting-by-meeting approach” in shaping its monetary policy decisions.

ECB staff now anticipate headline inflation to average 2.3% in 2025, 1.9% in 2026, and 2.0% in 2027, with the upward revision for 2025 driven by stronger energy price trends.

Excluding energy and food, the so-called core inflation is projected to average 2.2% in 2025, 2.0% in 2026, and 1.9% in 2027.

Analysts Reaction

Carsten Brzeski, Global Head of Macro at ING, said, “With the increased uncertainty and the prospects of large fiscal stimulus, the ECB’s direction of travel after today’s rate cut is no longer as clear as it was a few weeks ago.”

According to the analyst, a pause at the next meeting to discuss the new macro reality is now a possibility.

“However, even if the need for further rate cuts is gradually fading away, the ECB won’t be off the hook. Rising bond yields on the back of higher government debt could bring another theme to the eurozone soon: yield curve control.”

Jack Allen-Reynolds, Deputy Chief Euro-zone Economist at Capital Economics, commented, “Expectations of looser fiscal policy have caused investors’ expectations for the ECB’s deposit rate at the end of this year to rise by about 15bp since Monday, and for end-2026 they have increased by around 35bp.”

“We still suspect that the Bank will cut interest rates a few more times in the coming months as the economy remains sluggish and core inflation keeps falling.”

“But we now think the deposit rate will only decline to 2% rather than the 1.5% level we had previously assumed,” Allen-Reynolds added.

Inflation Accelerates In January

According to flash data from Eurostat , Eurozone consumer prices rose faster in January than the previous month, driven by higher energy costs.

Harmonized CPI inflation is estimated to have increased to 2.5% in January, up from 2.4% in December, aligning with market expectations cited by FXStreet .

Annual energy price inflation surged to 1.8% in January from just 0.1% in December.

Meanwhile, the core harmonized CPI—which excludes energy, food, alcohol, and tobacco—held steady at 2.7% year over year, surpassing forecasts of a slight decline to 2.6%.

Risks To 2025 Outlook Linger

Bert Colijn, Chief Economist at ING, said the trajectory for 2025 should be disinflationary, but the question is to what degree.

“With wage growth set to drop substantially towards the end of the year, a big current driver of domestic inflation is set to fade,” Colijn said.

“At the same time, energy prices have jumped to higher levels again and businesses are expecting to price higher costs through to consumers as business surveys indicate stronger goods and services inflation in the coming months.”

For Paolo Grignani, Senior Economist at Oxford Economics, inflation data brings mixed news for the eurozone economy.

“Disinflation is yet to arrive, with stickier components remaining stubbornly high. The manufacturing sector confirmed its first sign of relief in a while, albeit at different degrees among countries. However, as Trump kicked off tariffs on several commercial partners ,” Grignani said, several challenges lie ahead for the sector.

“While the EU has been spared for the moment, the sector will remain under scrutiny, as risks have significantly risen; moreover, even if Trump does not impose additional tariffs, the impact on the global value chain will likely be felt even in the eurozone.”

Similarly, the economist declared that the weakening exchange rate and its subsequent increased inflationary pressure may raise concerns among ECB members about the speed of policy normalization.

Economy Remains Flat in the Fourth Quarter

According to Eurostat data released Thursday , the eurozone economy remained stagnant in the fourth quarter of 2024, while unemployment saw a slight uptick in December.

Gross domestic product (GDP) showed no growth compared to the third quarter, which had recorded a 0.4% expansion. This fell short of the 0.1% increase expected by analysts surveyed by FXStreet.

On an annual basis, GDP growth held steady at 0.9%, matching the third quarter’s pace but missing the 1.0% forecast.

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Analysts Expect Further Rates

The ECB’s latest staff macroeconomic projections pointed to a modestly faster pace of disinflation now being foreseen, with headline HICP seen at 2.1% next year, 0.1% below the prior forecast. Meanwhile, GDP growth is now seen as being weaker, at just 1.1% next year and 1.4% in 2026.

Michael Brown, Senior Research Strategist at Pepperstone, said:

“These projections, though, will likely have an incredibly short shelf-life, given that they take no account of recent political tumult in France and Germany, nor do they account for the potential impacts of any trade tariffs imposed by the incoming Trump Administration early in the new year.”

In light of these and other downside risks, coupled with continued disinflationary progress being made, further 25 bps cuts, likely at each of the next four meetings, remain the base case for the analyst.

“Risks to this outlook, of course, tilt towards a more dovish path, potentially including 50bp rate cuts,” Brown added.

Controversial Debate on Disinflationary Trend

The minutes of the latest ECB meeting reveal that—despite some skepticism within the ECB regarding the sustainability of the disinflationary trend—concerns over economic growth and the potential benefits of a rate cut as a risk management tool ultimately drove the decision to proceed with the October rate reduction.

“This proposal [to cut rates] was driven by prudent risk management. If the slowdown indicated by economic activity metrics and the unexpected drop in inflation proved temporary, the October rate cut might simply have accelerated a decision that could have been made in December,” commissioners said and continued:

“However, if the data pointed to more persistent economic weakness and a stronger disinflationary trend, an October rate cut would, in hindsight, demonstrate a swift policy response to evolving macroeconomic conditions.”

Minutes also showed increasing concerns about the Eurozone’s growth outlook, highlighting that “the weaker incoming data were seen to increasingly raise the question of what should drive the projected economic expansion.”

Introducing the European Central Bank

The European Central Bank (ECB) is a central component of the Eurosystem and the European System of Central Banks (ESCB), making it one of the seven institutions of the European Union (EU). As one of the world’s foremost central banks, it holds a position of immense significance on the global stage.

The ECB Governing Council formulates monetary policy for the Eurozone and the European Union. It manages the foreign exchange reserves of EU member states, conducts foreign exchange operations, and defines the intermediate monetary objectives and key interest rates within the EU. 

To execute these policies and decisions, the ECB Executive Board operates under the authority of the Governing Council and may issue directives to the national central banks as needed. Additionally, the ECB possesses the exclusive authority to authorize the issuance of euro banknotes. Meanwhile, member states’ issuance of euro coins requires prior approval from the ECB. The ECB also oversees the functioning of the TARGET2 payments system.

Established in May 1999 through the Treaty of Amsterdam, the ECB’s crucial mission is to ensure and preserve price stability. Subsequently, on Dec. 1, 2009, the Treaty of Lisbon came into effect, officially designating the ECB as an EU institution.

Eurozone Expansion

Initially, the ECB was established to serve the Eurozone, consisting of eleven member countries. Over time, the Eurozone expanded to include Greece in Jan. 2001. It also added Slovenia in Jan. 2007, Cyprus, and Malta in Jan. 2008. Furthermore, Slovakia in Jan. 2009, Estonia in Jan. 2011, Latvia in Jan. 2014, Lithuania in Jan. 2015, and Croatia in Jan. 2023. 

Currently, President Christine Lagarde leads the ECB, which has its headquarters in Frankfurt, Germany. Before its new headquarters, it operated from the Eurotower.

The ECB operates in direct accordance with European Union law. Its €11 billion capital stock is collectively owned by all 27 central banks of EU member states as shareholders. Based on the population and GDP of member states, the initial capital allocation key was established in 1998 but has since undergone adjustments. Notably, shares within the ECB are non-transferable and cannot serve as collateral.

ECB Interest Rates

The key interest rates are instrumental tools the ECB uses within its operational framework to preserve price stability within the euro area.

These rates hold significant importance in conducting monetary policy, as they directly impact the cost of borrowing for various economic entities. These include governments, businesses, and households, both in capital markets and the market for bank loans. Furthermore, they influence the returns on various saving instruments, such as bank deposits.

Consequently, the ECB’s monetary policy decisions have a far-reaching impact on households’ and businesses’ spending, saving, and investment choices. It ultimately affects overall economic activity and, in turn, inflation rates.

The ECB maintains three key interest rates:

Main Refinancing Operations (MROs) Interest Rate

ECB establishes this rate to provide the banking system with weekly liquidity injections. It determines the cost credit institutions incur when borrowing funds from the ECB for one week.

Deposit Facility Rate

The ECB also sets the rate for the deposit facility. This dictates the interest paid to credit institutions for overnight deposits held at the central bank. Notably, the deposit facility rate remained negative from 2014 until July 2022.

Marginal Lending Facility Rate

This rate represents the cost credit institutions bear when they borrow money overnight from the ECB.

These interest rates are pivotal in the ECB’s pursuit of its monetary policy objectives. They significantly influence the broader economic landscape and inflation dynamics.

Eurozone Interest Rate Projections for the Next 5 Years

Given the many current uncertainties, formulating a realistic forecast for ECB interest rates over the next five years presents a considerable challenge. Nevertheless, the European Central Bank itself has offered projections extending as far as 2025 in its survey of professional forecasters.

Based on their econometric models, trading Economics anticipated a decrease to 2.75% in 2024 and a further decline to 1.5% in 2025.

The Influence of Interest Rates on Cryptocurrency

Cryptocurrencies, Bitcoin included, have demonstrated remarkable resilience even in the face of rising interest rates. Notably, Bitcoin experienced significant growth, with a surge of 2,000% observed between 2015 and 2016.

However, it is crucial to recognize that elevated interest rates can produce diverse effects on the cryptocurrency market. Some experts argue that persistently high inflation, rising gas prices, and increased energy costs linked to higher interest rates may potentially reduce risk appetite, thus creating challenges for cryptocurrencies.

Central Banks and Their Impact on Cryptocurrencies

Central banks have a significant influence on shaping economic conditions, directly impacting money circulation and financial market stability. Their ability to adjust interest rates directly affects borrowing rates for financial and banking institutions.

In response to widespread inflation, major central banks in developed economies, such as the Fed, the ECB, and the BoE, have chosen to raise interest rates.

The increasingly intertwined relationship between cryptocurrencies and these macroeconomic and monetary shifts is worth noting. The decisions to raise interest rates, particularly by the Fed, have immediate repercussions for cryptocurrency markets.

The Federal Reserve’s more assertive stance has injected uncertainty into the cryptocurrency space, affecting market sentiment as tighter monetary policies take hold.