ECB's Sixth Rate Cut: Boost or Bust for EU Stocks?

The European Central Bank (ECB) implemented its sixth interest rate cut since June, reducing the deposit rate by 25 basis points to 2.5% on Thursday last week (6 March). This decision aims to stimulate borrowing and investment amid escalating trade tensions with the US and increased defence spending across Europe. ​

The ECB's move seeks to counteract economic stagnation, with growth forecasts for 2025 revised down to 0.9%. Lower borrowing costs are expected to support European equities.

However, potential US tariffs and inflationary pressures from fiscal expansion could temper stock market gains. ECB President Christine Lagarde emphasised a data-dependent approach for future monetary policy decisions, indicating that further rate cuts are not guaranteed. ​

Inflation Outlook: Will the ECB Pause in April?

The ECB has updated its inflation projections, forecasting headline inflation at 2.3% for 2025, 1.9% for 2026, and 2.0% for 2027. These revisions suggest that inflation is stabilising near the ECB's 2% target

Despite these encouraging signs, underlying inflation pressures persist, particularly due to delayed wage and price adjustments in certain sectors. However, wage growth is moderating, and corporate profits are absorbing some of the inflationary impact. ​

Despite the easing, the ECB is treading carefully. President Christine Lagarde emphasised that future decisions will be guided by incoming economic indicators rather than a predetermined rate path. (Source: European Central Bank)

This cautious stance reflects the need to evaluate evolving economic conditions before proceeding with further policy adjustments.

ECB Rate Cut: What Will the Fed Do?

Attention turns to the Federal Reserve's (FED) upcoming policy decisions. The Fed has reduced rates three times since September 2024, bringing the federal funds to 4.50%.

The Federal Open Market Committee is scheduled to meet on 18-19 March. However, Fed Governor Christopher Waller has indicated that a rate cut is unlikely at this meeting, suggesting that any easing may occur later in the year. ​

Recent data shows US inflation unexpectedly rose to 3% in January, up from 2.9% in December, challenging the Fed's 2% target. As a result, the upcoming release of February's Consumer Price Index (CPI) on 12 March will be closely watched.

Euro Rally Continues Following Rate Cut

The result of the ECB meeting continued to support the euro against the U.S. dollar, with trading around 1.081 EUR/USD as of today (10 March). Since 21 February, when it stood at 1.047 EUR/USD, the euro has gradually appreciated by 3.25%.

This appreciation is attributed to the ECB's revised inflation projections, which now anticipate a 2.3% rate for 2025, up from the previous 2.1% forecast. The upward revision led market participants to reassess the likelihood of further monetary easing.

In contrast, the USD faced downward pressure due to ongoing trade tensions and concerns over domestic economic performance. 

Euro Economy Shows Bright Macro Outlook

The Euro Stoxx 50 initially rose 1.24% after the ECB’s rate cut, climbing from 5,471 to 5,539 on 6 March before edging down to 5,459 as of today. Markets reacted positively to the easing but remain cautious amid broader economic risks.

Germany’s proposed EUR 1 trillion investment plan, including EUR 500 billion for infrastructure, provides a further positive view of Europe’s economy. 

The fiscal push, alongside rising defence spending across the region, is fueling optimism about growth prospects.

Conclusion

The ECB’s latest rate cut provides a short-term boost for European equities and the euro, but long-term risks remain. Investors are weighing sluggish growth projections against rising fiscal spending in Germany and across the region.

Markets are pricing in limited room for further easing, with Lagarde emphasizing a data-driven approach. Meanwhile, the Fed’s reluctance to cut rates could widen the policy divergence, keeping pressure on the euro.

While defence and infrastructure investments support optimism, inflation uncertainty and geopolitical risks continue to cloud the outlook. Europe’s economy is at a crossroads—fiscal stimulus could fuel recovery, but markets remain wary of external shocks.

*Past performance does not reflect future results