The European Central Bank doesn’t have a role in helping governments finance more defense spending and will stick to its mission of price stability, President Christine Lagarde said.

The European Central Bank is set to cut interest rates again on Thursday. After cutting borrowing costs rapidly over the past nine months as inflation retreated and economic growth faltered, the euro zone's central bank has telegraphed another 25 basis point reduction in the deposit rate.

Although the ECB would not pre-commit to future rate cuts, the fact that Christine Lagarde did not push back on lower rate cut expectations is a sign that the ECB is comfortable with a neutral rate around 2%.

The market now expects less than three ECB rate cuts this year; the market had expected more than three cuts earlier this week. There has also been an increase in the ECB’s neutral rate from 1.8% at the start of this week, to 1.97% on Wednesday. The market is also starting to price in rate hikes from early 2026.

Officials concur that rates should be brought to levels that no longer constrain activity, known as neutral. Only a few, though, have floated the idea of pushing even lower to stimulate demand. While a recent study by ECB staff put neutral at 1.75% to 2.25%, some hawks say it may be higher.

Tariff relief, ECB policy, and Germany’s fiscal steps shape the market. Will easing tensions sustain the rally?