ECB Cuts Rates by 25bps to 2.50%, Euro Slides to 3-Month Low

The European Central Bank cut its key deposit rate by 25 basis points to 2.50% on Thursday, delivering on market expectations as the eurozone economy continues to underperform relative to the United States.

President Christine Lagarde noted that "the disinflationary process is well on track" in the euro area, with headline inflation falling to 2.1% in January. However, she was careful to avoid pre-committing to further cuts, stating the ECB remains "data-dependent."

The euro dropped 0.6% against the dollar to $1.0285, its lowest level since November 2025, as the rate differential between the Fed and ECB widened further. European government bond yields fell across the curve, with the German 10-year Bund yield dropping 8bps to 2.18%.

Market impact:

• EUR/USD fell to $1.0285 (-0.6%)
• German 10Y Bund yield: 2.18% (-8bps)
• Euro Stoxx 50 gained 0.4% on cheaper borrowing costs
• European bank stocks underperformed on compressed margins

The policy divergence between the ECB and Fed has become a dominant theme in FX markets. While the Fed appears content to hold rates for an extended period, the ECB faces mounting pressure from weak German manufacturing data and political uncertainty in France.

Economists polled by Reuters expect one more 25bp cut from the ECB in April, which would bring the deposit rate to 2.25% — a level not seen since early 2023.