The European Central Bank (ECB) has once again cut its key interest rates by 25 basis points. The deposit rate now stands at 2.5%, down from 2.75%, while the refinancing rate was set at 2.65% (previously 2.9%). This move signals a continued effort to support the bloc’s economy, though the ECB has refrained from committing to further rate cuts.
Despite inflation being expected to ease to 2.3% in 2025 and 1.9% in 2026, growth projections for the Eurozone remain weak, with forecasts at just 0.9% for 2025 and 1.2% for 2026. The ECB attributes this slowdown to weaker exports and investment, both hampered by global trade uncertainty.
Christine Lagarde, ECB’s president, emphasized that future monetary policy decisions will depend on macroeconomic data. While lower rates are intended to ease financial conditions—reflected in a slight drop in bank lending rates—borrowing costs in bond markets are rebounding. This suggests that while further cuts remain possible, the bulk of the ECB's easing cycle may now be behind us.
At the same time, the euro has strengthened. Investors had anticipated a longer rate-cutting cycle, potentially pushing European rates below 2.0%, which would have widened the gap with the more attractive yields in the U.S. However, the ECB’s cautious stance has led markets to adjust their expectations, supporting the euro, which recently climbed above USD 1.08 for the first time since autumn.
For our part, we believe that growth in the euro area will remain weak. The ECB is doing what it can. The stated desire to increase deficits (in Germany) and revive the defence sector everywhere will, in the long term, give our economies a little boost. But the reforms needed to address the competitiveness problems highlighted by the Draghi report are still awaited.
Economic stagnation persists
Such a situation aligns with Europe's economic activity stagnation in February.
Manufacturing activity is down for the 32nd consecutive month. While the service sector is still expanding, the European economy is practically at a standstill in February, as it was in the first month of the year.
Eurozone equities out of our portfolio
It isn't easy to anticipate a significant economic improvement in the coming months. On the other hand, intensifying the trade war risks tripping the European economy, which heavily depends on exports.
We are exposed to the Eurozone through bonds. Regarding equities, the market as a whole is less attractive, and we don't buy them in the Eurozone as part of our portfolio strategy. However, some individual stocks remain interesting.