The European Central Bank cut interest rates again on Thursday but warned of “phenomenal uncertainty” including the risk that trade wars and more defence spending could fuel inflation, raising the prospect of a pause in its policy easing next month.

Making its sixth cut since June, the ECB lowered the deposit rate to 2.5 per cent in a nod to slowing inflation and faltering activity, and said monetary policy was becoming less restrictive of economic growth as inflation falls towards its 2 per cent target.

While this wording could suggest further rate cuts to come, ECB President Christine Lagarde declined to repeat her past guidance that the downward direction of rates was clear and emphasized that a cut or a pause were both possibilities.

“Monetary policy is becoming meaningfully less restrictive,” Ms. Lagarde said. “It’s not just an innocuous little change, it’s a change that has a certain meaning.”

Sources speaking to Reuters after the meeting said that policy makers see a growing chance of a pause in April as they need time to gain greater clarity about trade and fiscal policy.

But rates are still likely to come down over the course of this year as a 2.5-per-cent deposit rate is still restricting a euro zone economy that is skirting recession, they said.

The ECB has long said restriction will no longer be necessary once inflation – at 2.4 per cent last month – is safely on course to meet its target this year.

Ms. Lagarde said the ECB would be even more dependent on incoming data than in the past, and that it would pause easing if the numbers suggested that was needed to get inflation to 2 per cent.

Updated projections now show the ECB hitting the target only in the first quarter of 2026, a further slippage that will concern some policy makers.

Economists’ differing assessments of the path ahead reflected the uncertainty.

“We expect the ECB to pause at the next meeting and to cut only one more time before the summer,” ING economist Carsten Brzeski said. “With the increased uncertainty and the prospects of large fiscal stimulus, the ECB’s direction of travel after today’s rate cut is no longer as clear as it was a few weeks ago.”

Nordea said a cut in April remained its baseline, but that its analysts expected the move to be the last in the current easing cycle.

“If the data surprise positively, the cut could be postponed until the June meeting. If the data disappoint, then the ECB could easily cut more than once more,” Nordea said.

Investors were also reassessing.

Financial markets now foresee another 36 basis points of rate cuts this year, or between one and two moves, suggesting that one full rate cut has been priced out this week.

“By twice refusing to confirm that the next move will likely be a cut, Lagarde unnerved a market in need of reassurance after the sharp moves of the last few days and triggered yet another leg lower in bond prices,” said Marco Brancolini, head of euro rates strategy at Nomura.

The euro rose to US$1.0854 after the ECB’s decision, the highest since Nov. 6, the day after U.S. President Donald Trump’s election victory.

Ms. Lagarde said the central bank for the 20-country euro zone was watching how the transformational changes to fiscal rules announced this week by Germany and the European Commission to boost defence and infrastructure spending would play out.

These would support growth, she said, although their implementation was still uncertain.

A potential trade war with the United States and the currency bloc’s possible retaliation could work the other way around and hurt growth while boosting prices.

“We have huge uncertainty,” Ms. Lagarde said. “Some people have used the adjective ‘phenomenal’ uncertainty.”

The ECB lowered its 2025 economic growth forecast, released quarterly, for the fourth consecutive time, putting expansion this year at just 0.9 per cent, only slightly above the 0.7-per-cent pace recorded in 2024.

Inflation was meanwhile seen at 2.3 per cent in 2025, above the 2.1 per cent seen three months ago. Ms. Lagarde nevertheless said disinflation in the euro zone remained on track and that higher energy costs were behind the small slippage.

While more spending on defence and infrastructure is better for growth, it could also add to price pressures. That risk has pushed measures of longer-term inflation to 2.23 per cent from around 2.05 per cent early this week, an unusually large shift.

“With so many moving parts in terms of geopolitics, trade frictions and fiscal policy potentially offsetting each other, it’s difficult to form a forecast with any reasonable degree of conviction,” Pictet’s Frederik Ducrozet said.

“That said, we expect services inflation to ease further in the coming months, and we assume that the U.S. will go ahead with tariffs on Europe, making it more likely than not that the ECB will cut rates again in April.”