ECB: The last easy cut

Geopolitical events are moving fast and the ECB will need to remain focussed

At the conclusion of its latest monetary policy meeting, the ECB cut all of its policy rates by 25bps. From 12 March, the Marginal Lending Facility will fall to 2.90%, the Main Refinancing Rate will be 2.65%, and the Deposit Facility Rate (DFR) will be 2.50%.

In the lead up to the meeting, the market had fully priced in a 25bp cut to the deposit facility rate. Earlier this year, the ECB released an article which forecast that the point in which the DFR could be considered to be in the neutral range would lie between 1.75% and 2.25%. Following the latest cuts, the DFR now sits closer to the top end of this range and the ECB now deems monetary policy to be “meaningfully less restrictive”, moving away from the previous wording as being restrictive.

The ECB remains data dependent and will not follow a predetermined path, but the likelihood of a pause in the current rate cutting cycle will grow stronger at each subsequent meeting. All votes from Governing Council (GC) members fully supported today’s decision, although it is noteworthy that one GC member abstained.

Revised staff projections downgraded eurozone growth to 0.9% for 2025, 1.2% for 2026 and 1.3% for 2027, due to global trade policies and the threat of increased trade tariffs.

Another “Whatever it takes” moment

The geopolitical environment is moving even faster than many had predicted it would under the new Trump regime. With the US seemingly turning its back on Europe, many other European governments may follow Germany’s lead in becoming more self-reliant on defence and strengthen trade alliances with fellow European neighbours to counter threatened US tariffs.

Over the past decade, successive ECB presidents have called on European governments to boost investment and fiscal stimulus to complement monetary policy, with the goal of increased economic growth. If the stimulus package that was recently announced by the new German government is passed, it will boost economic activity and in turn take a share of the heavy lifting that to date has largely fallen solely on the shoulders of the ECB. If momentum builds, then the need for looser monetary policy will diminish and rates will likely remain closer to the top of the current neutral range.

Market reaction and fund positioning

With so much uncertainty and compelling arguments in favour of both upside and downside risks, market pricing has increased the probability of a pause in the rate cutting cycle at the next meeting in April. The ECB has repeatedly stated its data dependency but the fluidity of the current geopolitical environment will also have a very large impact on the minds of the GC.

The EUR LVNAV strategy is well positioned to benefit from the latest rate cuts, with a weighted average duration (WAM) in the 40-50 day range. In addition, the strategy has moderately increased the floating element of the portfolio, which will help to support the yield should the ECB pause rate cuts earlier than was anticipated.

For euro cash investors, the rate cut will trigger lower deposit rates at the start of the next Reserve Period (12 March). However, step-out money market fund strategies with longer durations will shield investors from the full impact of lower rates in the medium term.

Conclusion

The fifth consecutive interest rate cut has brought the ECB’s Deposit Facility Rate closer to the upper end of the bank’s projected neutral range. The path forward is now less clear than it has been in recent history. While the ECB remains committed to consistently achieving its 2% inflation target over the medium term, the increasingly turbulent geopolitical landscape presents unique challenges. This environment will require the current policymakers at the ECB and other central banks to navigate risks that few of their predecessors have faced. In light of these uncertainties, investors should adopt a flexible approach to cash investing, consider laddering maturities, and maintain the agility to respond to a rapidly evolving interest rate environment.

Source for all data unless otherwise stated: European Central Bank, J.P. Morgan Asset Management; data as of 6 March 2025

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