Closing summary
The European Central Bank has cut interest rates across the 20-member eurozone for the second time this year, and warned that trade war fears were hurting Europe’s economy.
The Frankfurt-based rate setter cut its benchmark deposit rate by a quarter of a percentage point to 2.5%, in line with City economist expectations, as Donald Trump has threatened 25% tariffs on all goods imported from the EU, similar to levies on imports from Canada and Mexico that took effect this week.
The ECB president, Christine Lagarde, blamed a “high level of trade and policy uncertainty” for a downgrade in growth this year.
“We know that tariffs, and particularly if there is retaliation, are not good at all and are net negative on pretty much all accounts,” she told journalists at a press conference. She explained that the threat of tariffs is also damaging because such fears put “a brake on investment, on consumption decisions, decisions on employment, hiring and all the rest of it”.
There was better news on the battle against inflation, which the ECB said was moderating.
Economists concluded that there are more rate cuts to come but that the pace of easing will be slower.
The euro rallied, rising by 0.5% to $1.084. Sterling is also higher, up 0.1% to $1.2911, as the dollar continues to slide against major currencies.
Germany’s Dax has climbed 0.85% and the Italian stock market is 0.7% ahead while the French bourse is flat and the UK’s FTSE 100 index lost 0.77%, following a gloomy construction survey.
Our other main stories:
Thank you for reading. We’ll be back tomorrow. Take care – JK
Key events
John Lewis hands shop workers 7.4% pay rise
Sarah Butler
Before I go, our retail correspondent Sarah Butler has sent this across:
John Lewis is handing its shop workers a 7.4% pay rise to a minimum of £12.40 an hour – with some deemed to have made an “exceptional contribution” to the group getting 2% more.
The group, which owns 36 department stores and the Waitrose supermarket chain, said it was investing £114m in raising pay for 65,000 people across the business, taking the minimum hourly rate well above the new legal minimum wage of £12.21 from April for over-21s. However the rate is 20p an hour behind Marks & Spencer’s pay rise announced this week and 31p behind B&Q’s latest rate.
John Lewis’s decision to hand an extra pay rise to some workers linked to performance is also likely to prove controversial at the staff-owned business which has not paid an annual bonus for workers for two years and is thought unlikely to announce award a bonus alongside its annual results next week.
In 2021, it emerged that 16 special contribution bonuses went to directors and heads of departments when the vast majority of workers did not receive an annual bonus.
Closing summary
The European Central Bank has cut interest rates across the 20-member eurozone for the second time this year, and warned that trade war fears were hurting Europe’s economy.
The Frankfurt-based rate setter cut its benchmark deposit rate by a quarter of a percentage point to 2.5%, in line with City economist expectations, as Donald Trump has threatened 25% tariffs on all goods imported from the EU, similar to levies on imports from Canada and Mexico that took effect this week.
The ECB president, Christine Lagarde, blamed a “high level of trade and policy uncertainty” for a downgrade in growth this year.
“We know that tariffs, and particularly if there is retaliation, are not good at all and are net negative on pretty much all accounts,” she told journalists at a press conference. She explained that the threat of tariffs is also damaging because such fears put “a brake on investment, on consumption decisions, decisions on employment, hiring and all the rest of it”.
There was better news on the battle against inflation, which the ECB said was moderating.
Economists concluded that there are more rate cuts to come but that the pace of easing will be slower.
The euro rallied, rising by 0.5% to $1.084. Sterling is also higher, up 0.1% to $1.2911, as the dollar continues to slide against major currencies.
Germany’s Dax has climbed 0.85% and the Italian stock market is 0.7% ahead while the French bourse is flat and the UK’s FTSE 100 index lost 0.77%, following a gloomy construction survey.
Our other main stories:
Thank you for reading. We’ll be back tomorrow. Take care – JK
Bank of England policymaker Catherine Mann is due to give a speech, entitled “Holding the anchor in turbulent waters,” in New Zealand later today.
In the text, just released, she explained her decision to vote for a bigger ‘activist’ half point cut at the Bank’s last meeting (when the rate-setting committee decided to cut by a quarter point):
In short, international spillovers have dominated the signals from UK domestic data and monetary policy actions. With substantial volatility coming from financial markets, especially from cross-border spillovers, the founding premise for a gradualist approach to monetary policy is no longer valid.
To conclude, unlike the Taihoro, New Zealand’s entry, which skimmed above the seas off Barcelona to win the Louis Vuitton 37th America’s Cup last year, monetary policy must navigate through choppy financial markets, shock-ridden economies, and sticky expectations.
Larger cuts, such as the one I voted for in the latest meeting, cuts through this turbulence, with the objective to more effectively communicate the stance of policy and influence the economy. At the same time, keeping monetary policy restrictive for longer allows me to evaluate developments on inflation persistence. This combination is an activist monetary policy strategy.
You can read the full speech here.
More possible row back on US tariffs?
🚨 TARIFF LATEST: Secretary Lutnick tells CNBC that President Trump is likely to decide today to exempt *ALL* USMCA-compliant trade from the Canada and Mexico tariffs for one month, until April 2 (when other tariff wave is coming). Not just autos, which was the focus yesterday.
— Josh Wingrove (@josh_wingrove) March 6, 2025
Clemens Fuest, president of the Munich-based Ifo Institute for economic research sees no more scope for further interest rate cuts after today’s decision by the ECB.
The ECB’s interest rate cut was expected by the markets and had already been priced in. The main refinancing rate is now only just above the inflation rate.
Rising wages and the increase in new government borrowing could lead to inflation rising again instead of falling further. As a result, there is likely to be little scope for further interest rate cuts.
On tariffs and trade wars, Christine Lagarde said they are clearly bad for economies, and reiterated that fears of trade wars alone are damaging because they affect investment and hiring decisions.
We know that tariffs, and particularly if there is retaliation, are not good at all and are net negative on pretty much all accounts. But that’s my personal view. Although I think around the table of the governing council, we all agreed that it was net negative if it/ when it happens, and it’s even negative before it happens, because the uncertainty that is generated, the undermined confidence that results from just the threat of those tariff increases and potential retaliations, are putting a brake on investment, on consumption decision, decisions on employment, hiring and all the rest of it.
The press conference is now over.
Returning to the subject of higher defence spending in Germany and the rest of Europe, ECB president Christine Lagarde said:
Typically, investments in defence are a source of innovation, therefore will improve productivity. We are very attentive to that, and we are hoping that it will have those impacts on the European economy. Is it a ‘whatever it takes’ moment for the German economy? It’s not for me to say.
More rate cuts to come, but pace to slow, economists say
Economists conclude from the European Central Bank’s language today that there are more interest rate cuts to come, but the pace of easing is likely to slow.
The euro is still rallying, up 0.3% at $1.0822.
Thomas Pugh, economist at the consulting firm RSM, said:
Admittedly, this will be the last “easy” rate cut, the result of future meetings will be less obvious, and the pace of monetary easing will slow. But we still expect another two rate cuts this year.
There is now a debate on the ECB committee that rates may be hitting up against the neutral rate and further cuts would take them out of restrictive territory. The language in the press release signalled a slight shift to “monetary policy is becoming meaningfully less restrictive”. The statement also acknowledges that new borrowing is becoming less expensive. However, it also emphasised that new lending is weak and the economy faces challenges. Indeed, the committee increased its inflation forecasts slightly but lowered its growth ones, emphasising the trade-off between stickier inflation and weaker growth.
What’s more, there has been a step change in the risks facing the inflation outlook since the last meeting. The US has imposed large tariffs on its major trading partners and threatened 25% tariffs on the EU. A sharp increase in trade tariffs and retaliatory measures would be stagflationary for the EU (depressing demand while pushing inflation higher), which would create a tough policy trade off for the ECB.
At the same time, many European countries, especially Germany, are planning to substantially increase defence and infrastructure spending. This could represent a significant demand stimulus to the European economy that would boost growth and potentially inflation. Indeed, German 10-year yields have soared by over 40bps this week.
Christine Lagarde said the governing council decided to cut interest rates almost unanimously – without any members opposing, but one governor abstained.
She named the governor who abstained as Robert Holzmann, an Austrian economist and the governor of Austria’s central bank.
The governing council, the main decision-making body of the ECB, has 26 members –– the six members of the Executive Board, plus the 20 governors of the national central banks of the euro area countries.
She was also asked about the planned splurge in defence spending in Europe, and replied:
This is work in progress, and we have to be attentive, vigilant. We have to understand how this is going to work, what the timing will be, what the financing will be, so that we can then draw the conclusions and appreciate how much it will contribute to growth and what impact it would have eventually on inflation.
But one thing that around the table of the governing council was clear is that.. it would be supportive to European growth at large and would be a boost to the European economy.
The European Commission has set out a five-part plan to bolster Europe’s defence industry to raise nearly €800bn (£660bn) and help provide urgent military support for Ukraine after the US suspended aid to Kyiv.
Ursula von der Leyen, the head of the commission, said on Tuesday the 27-member bloc would propose giving member states more fiscal space for defence investments, as well as €150bn in loans for those investments, and would also aim to mobilise private capital.
Then on Tuesday night, the prospective partners of Germany’s next government, the CDU/CSU and SPD, agreed a deal to loosen the country’s debt brake to set up a €500bn infrastructure fund and allow effectively unlimited defence spending.
