The European Central Bank (ECB) lowered its benchmark deposit rate by 25 basis points to 2% on Thursday, marking its eighth cut since June last year. The move follows inflation falling to 1.9% in May—just below the ECB’s 2% target—and arrives amid rising geopolitical tensions, slowing economic growth, and renewed trade risks from the United States.
While the rate cut was widely expected—traders had priced in a near-99% chance of the decision—the ECB’s forward guidance struck a more cautious tone. President Christine Lagarde said the ECB was in a “good place” but declined to confirm whether more cuts would follow, leaving markets to speculate about a possible summer pause.
“We are in a good position to navigate the uncertain conditions that will be coming up,” Lagarde said, adding that it would be “far-fetched” to say the ECB was confident, even after the rate move.
Revised forecasts and cautious optimism
In its latest projections, the ECB revised down its inflation forecast for 2025 to 2% from 2.3% in March, citing a stronger euro and lower energy prices. Inflation in 2026 is also expected to fall, while core inflation for 2024 was revised up to 2.4%. Growth forecasts were left unchanged at 0.9% for 2025, although Lagarde said the 0.3% GDP growth in Q1 could be revised upward.
Despite this measured optimism, the ECB acknowledged persistent uncertainty, particularly from US trade policy. President Donald Trump’s tariff hikes, including a doubling of duties on steel and aluminium, have raised concerns about global supply chains and potential retaliatory measures from Europe.
“A further escalation of trade tensions… would result in growth and inflation being below baseline projections,” the ECB warned. A severe trade war could shave 1% off eurozone growth between 2025 and 2027.
Policy flexibility amid diverging pressures
The ECB emphasized its commitment to a data-driven approach, stating that future decisions would depend on the inflation outlook, monetary policy transmission, and incoming data. Lagarde also confirmed that one member of the governing council opposed the rate cut, highlighting internal divisions.
While some, like ING’s Carsten Brzeski, see a “summer pause” in rate moves, others argue the ECB may still be underestimating downside risks.
“The case for another rate cut is crystal clear,” said J.P. Morgan’s Natasha May, citing fast-receding inflation and growth headwinds. Still, the bar for further cuts is higher now that rates are in the neutral range.
The ECB’s moves stand in contrast to the US Federal Reserve, which has kept rates steady amid concerns that Trump’s tariffs could fuel inflation. By contrast, European policymakers are grappling with the disinflationary effect of redirected Chinese exports, a stronger euro, and soft energy prices.
Lagarde also dismissed speculation about her leaving the ECB for a new role, stating she is “fully determined” to serve her full term.
Market reaction mixed
Following the announcement, the euro rose 0.6% against the US dollar, while the pan-European Stoxx 600 index slipped 0.2%. Investors appeared to focus more on the ECB’s cautious tone and geopolitical risks than on the cut itself.
