The European Central Bank announced on Thursday that it would slash key interest rates by 25 basis points in a bid to wind down the restrictive monetary policy.

Effective from March 12, the interest rates on the deposit facility, the main refinancing operations and the marginal lending facility will be decreased to 2.50 percent, 2.65 percent, and 2.90 percent respectively, said the central bank in a statement.

The disinflation process is well on track, with headline inflation averaging 2.3 percent in 2025, 1.9 percent in 2026 and 2.0 percent in 2027, the ECB said.

Inflation in the euro area edged down to 2.4 percent in February from 2.5 percent in January, according to the statistical office of the EU. Citing indicators of underlying inflation, the ECB believes that inflation is returning sustainably to its medium-term target of two percent.

The decision to keep on cutting rates came at a time when the economy in the eurozone is facing increasing uncertainties. In its latest edition of the staff projections on Thursday, the ECB lowered its forecast for economic growth in the eurozone to 0.9 percent for 2025, 1.2 percent for 2026 and 1.3 percent for 2027.

This marks a downward revision from the ECB's forecast in December last year, which had projected 1.1 percent growth in 2025 and 1.4 percent in 2026, while the 2027 outlook remains unchanged.

The ECB attributed the weaker growth outlook for 2025 and 2026 to declining exports and sluggish investment, citing high trade policy uncertainty and broader economic instability as key factors.

While the monetary policy is becoming "meaningfully less restrictive," the central bank noted that lending in the euro area remains subdued due to the past rate hikes.

The ECB calls on euro area member states to "swiftly" adopt the proposals made by the European Commission to enhance structural reforms and strategic investment to make the economy more productive and competitive.

"The current inflation trend in the euro area has provided strong arguments for today's decision," said Heiner Herkenhoff, Chief Executive of Association of German Banks.

The risk that U.S. tariff policies could also drive inflation higher in the euro area is increasing - for example, through retaliatory tariffs imposed by the European Union or further depreciation of the euro, he said.

"The ECB must remain vigilant. The widespread market expectations that European monetary policymakers will continue the rate-cutting process unchecked in the coming months should not be supported by the ECB," said Herkenhoff.