6 March 2025
If you are covering the European Central Bank’s decision to cut interest rates, please find below a comment from Lindsay James, investment strategist at Quilter:
“Today’s cut in interest rates by the European Central Bank will most definitely be based on the facts and data prior to events of the last week. Since the announcement of aggressive German spending proposals on defence and infrastructure, in the wake of the verbal fracas in the White House between Trump and Zelenskyy, German bund yields have surged, and with it expectations for future rate cuts have been trimmed back.
“Despite recent events, the European economy still needs supporting and as such the market is still pricing in almost two further rate cuts in 2025, with recent inflation data reasonably encouraging. Headline inflation eased to 2.4% in Feb from 2.5%, whilst core inflation dropped to 2.6% from 2.7%.
“However, investors will be listening carefully to any comments from the ECB on the expected impact of German spending plans that amount to around 900bn euros. These plans would reverse decades of caution stemming from its difficult memories of hyperinflation last century and together with its announcement of remilitarisation means Germany is turning its back on policymaking of the post-war decades in the face of a new threat from an old enemy.
“The ECB is likely to be fairly cautious of treading such new ground and higher interest rates may prevail as a result. Markets are already digesting the impact by marking German ten year bund yields up, reflecting better growth prospects for the German economy, with government bond yields moving higher across the Eurozone. Whilst Germany’s history of fiscal prudence means it has debt to GDP at an enviable 63%, compared to around 110% in France, a shift of this magnitude underlines the increasing reliance of governments on their bond markets at a time when pressure on spending is only rising.”
