The European Central Bank (ECB) is considering removing the term “restrictive” from its monetary policy stance as early as its next meeting in March, according to sources familiar with internal discussions. This potential shift signals that policymakers may be preparing to adjust their approach to interest rate cuts and overall economic support in the coming months.
With a quarter-point reduction in borrowing costs highly likely in March, bringing the deposit rate down to 2.5%, officials are debating whether this level still justifies being classified as restrictive. The decision to revise the ECB’s language would reflect ongoing evaluations of whether policy settings remain tight enough to curb inflation or if they have entered a more neutral phase.
While the ECB has publicly maintained its commitment to data-driven decision-making and avoided pre-commitments on rate cuts, internal discussions suggest that policymakers are increasingly assessing the potential end point of their current easing cycle. Despite expectations for further rate reductions in 2025, some officials are also considering whether a pause may be necessary along the way.
Market reactions to this possibility were immediate, with the euro erasing earlier losses and stabilising around $1.042. German bond futures trimmed gains after the European trading session as traders factored in the likelihood of a shift in ECB communication. Market pricing currently anticipates at least three additional quarter-point rate cuts in 2025, which would bring the deposit rate to 2%.
The ECB has previously estimated that the neutral rate—where interest rates neither stimulate nor constrain economic activity—falls between 1.75% and 2.5%. President Christine Lagarde recently suggested a slightly narrower range of 1.75% to 2.25%. Defining this neutral level more precisely would allow the ECB to fine-tune its policy, balancing its mandate of controlling inflation with the need to support economic demand.
Recent inflation data from key eurozone economies present a mixed picture. In France, consumer prices remained steady at 1.8% in January, while Spain experienced an unexpected uptick in inflation earlier in the week. These variations indicate that the ECB will need to carefully assess the broader inflation trend before making definitive changes to its policy stance.
Lagarde announced that the ECB will publish a research report on 7 February to guide the Governing Council’s future policy decisions. While she declined to specify whether interest rates should move below the neutral level to stimulate growth, she reiterated that monetary policy remains restrictive for now.
The ECB’s March meeting will provide further clarity on how policymakers intend to navigate the evolving economic landscape, with markets closely watching for any adjustments to both interest rates and the central bank’s communication strategy.
