The bank stuck to its plan to lower rates in the face of economic challenges, including threats of US tariffs and plans to boost European military spending.

The ECB cut its main interest rate to 2.5% from 2.75%, and once again reduced its forecasts for economic growth in the eurozone.

The latest cut came as a sell-off of German government bonds spread to other bond markets, including the UK.

The sell-off came after Germany’s move this week to increase military and infrastructure spending.

Political parties in talks to form a new government plan to pay for this by loosening Germany’s fiscal rules, raising the prospect of a big increase in debt.

In response, longer term German bonds saw their biggest sell-off in years on Wednesday.

This pushed borrowing costs – as measured by the yields on the Germany’s 10-year bonds – up by biggest daily amount since May 1997.

On Thursday, German borrowing costs – as measured by the yields on the country’s bonds – continued to rise.

Yields continued to rise on Thursday, hitting 2.929% at one point – the highest level since October 2023.

The increase has had a knock-on effect on other countries, with UK borrowing costs also increasing.

UK government borrowing costs have already risen due to concerns about persistent inflation and interest rates not coming down as quickly as previously thought.

However, Lindsay James, an investment strategist at Quilters, said the market was still expecting the Bank of England to make two further rate cuts in 2025, “with recent inflation data reasonably encouraging”.

With inflation getting closer to its 2% target, the ECB said its interest rate cuts were “making new borrowing less expensive for firms and households”.

But it trimmed its prediction for eurozone growth, putting expansion in 2025 at just 0.9%, only slightly above the 0.7% pace recorded last year.

The ECB faces a number of upcoming challenges as it tries to get inflation to its 2% target.

The eurozone economy may suffer if the Trump administration goes ahead with plans to impose “reciprocal tariffs” on every country that taxes US imports.

Speaking at a defence summit in Brussels, Hegseth said it would only be possible to establish a “durable peace” with a “realistic assessment of the battlefield”.

During an uncompromising speech, he also downplayed the prospect of Ukraine joining Nato, ruled out deploying US troops to Ukraine under any future security arrangement and said European nations needed to spend much more on defence.

The Nato military alliance has previously pledged Kyiv an “irreversible path” to membership.

Hegseth’s comments will be met with dismay in Ukraine – which has repeatedly called for Nato membership and has rejected ceding territory as part of any peace deal – and will be welcomed by Moscow.

The new US defence secretary’s remarks are also the clearest indication yet of the Trump administration’s position on the Ukraine war and what a peace plan to end the conflict could involve.

There will also be nervousness across the continent after Hegseth suggested the US would significantly scale back its support for Ukraine, insisting that European nations would now need to provide the “overwhelming share” of aid to Kyiv.

Hegseth, who was appointed defence secretary after Donald Trump returned to the US presidency in January, was speaking at the Ukraine Defence Contact Group, a meeting of more than 40 countries allied to Ukraine.

He said: “We want, like you, a sovereign and prosperous Ukraine.

“But we must start by recognising that returning to Ukraine’s pre-2014 borders is an unrealistic objective.

“Chasing this illusionary goal will only prolong the war and cause more suffering.”

Russia annexed the Black Sea peninsula of Crimea from Ukraine in March 2014 and then backed pro-Russian separatists in an armed insurgency against Kyiv’s forces in eastern Ukraine.

Moscow currently controls around a fifth of Ukraine’s territory, mainly in the east and south.

Hegseth said any durable peace must include “robust security guarantees to ensure that the war will not begin again”.

However, he said “the United States does not believe that Nato membership for Ukraine is a realistic outcome of a negotiated settlement”.

Instead, security guarantees should be backed by “capable European and non-European troops”.

“If these troops are deployed as peacekeepers to Ukraine at any point, they should be deployed as part of a non-Nato mission and they should not be covered under Article 5,” he said, referring to the alliance’s mutual defence clause.

Hegseth also told Nato’s European members that they would need to provide the lion’s share of future aid for Kyiv, warning that Washington “will no longer tolerate an imbalanced relationship” with its allies.

“Safeguarding European security must be an imperative for European members of Nato,” Hegseth said. “Europe must provide the overwhelming share of future lethal and non-lethal aid to Ukraine.”

The US has been Ukraine’s biggest financial and military backer but Trump has been repeatedly critical of US aid spending and has said his priority is to end the war, which escalated in February 2022 after Russia’s full-scale invasion.

Hegseth echoed calls by Trump for Nato allies to increase their defence spending to 5% of their GDP, instead of the current 2% target – saying the latter is “not enough”.

The US currently spends roughly 3.4% of its GDP on defence, while the UK spends about 2.3%. Countries closer to Russia, like Poland and the Baltic states, spend the most proportionately at around 4%.

It will be difficult for Ukraine to hold back Russia’s advances without the same scale of support provided by Washington during Joe Biden’s administration.

While Russia is losing large numbers of troops in the conflict, the country’s commanders are prepared to throw everything at Ukrainian front lines.

Russia is also now spending more on defence than the whole of Europe combined, according to figures from The Military Balance, an annual comparison of the strengths of armed forces around the world.

Earlier this week, Ukrainian President Volodymyr Zelensky said he was ready to negotiate a peace deal with Russia but wanted his country to do so from a “position of strength”.

Speaking to the Guardian, Zelensky said if Trump was able to get Ukraine and Russia to the negotiating table, the Ukrainian president planned to offer Russia a straight territory exchange, giving up land Kyiv has held in Russia’s Kursk region since the launch of a surprise offensive six months ago.

“We will swap one territory for another,” he said, but added that he did not know which part of Russian-occupied land Ukraine would ask for in return.

Zelensky also said he would offer US firms lucrative contracts to rebuild Ukraine, in an apparent attempt to get Trump onside.

In November last year, he and the US president spoke following Trump’s election victory.

Zelensky said he had a “constructive exchange” with the then president-elect and that he was certain the war with Russia would “end sooner” than it otherwise would have once Trump became president.

But Trump’s Democratic opponents have accused him of being too close to Russian President Vladimir Putin and say his approach to the war amounts to surrender for Ukraine, which would in turn endanger all of Europe.

It also remains unclear whether a diplomatic solution to the war could be reached anytime soon that would be acceptable to both sides.