The European Central Bank’s easing cycle reached the one-year mark on Thursday, June 5, when policymakers delivered another interest rate cut amid growing concerns about the struggling eurozone economy and global trade tensions. The ECB cut its key deposit rate a quarter point to 2%, as widely expected, its seventh consecutive reduction and eighth since June last year when it began lowering borrowing costs.
It also lowered its inflation forecast for 2025, with consumer price increases now expected to hit the central bank’s 2% target this year. With inflation under control following a post-pandemic surge, the ECB has shifted its focus to dialling back borrowing costs to boosting the beleaguered economies of the 20 countries that use the euro.
US President Donald Trump’s tariffs have added to an already uncertain outlook for the single-currency area, with Europe firmly in his crosshairs, fuelling fears about a heavy hit to the continent’s exporters. Announcing the rate decision, the ECB struck a measured tone about the US levies and the potential for retaliation.
It noted that the “uncertainty surrounding trade policies is expected to weigh on business investment and exports,” but added that “rising government investment in defense and infrastructure will increasingly support growth over the medium term.”
“Higher real incomes and a robust labor market will allow households to spend more. Together with more favorable financing conditions, this should make the economy more resilient to global shocks,” it added.
It left its growth forecast for 2025 unchanged at 0.9%. It also said inflation was now around target, dropping previous language that it was “on track.” Eurozone inflation came in at 1.9% in May.
All eyes will now be on ECB President Christine Lagarde’s post-meeting press conference for any hints that the Frankfurt-based institution might be gearing up to pause its cuts in July to take stock of developments, as some expect.
The ECB’s series of cuts stands in contrast to the US Federal Reserve, which has kept rates on hold recently amid fears that Trump’s levies could stoke inflation in the world’s top economy.
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Lagarde may also face questions on her own future after the Financial Times last week reported she had discussed leaving the ECB early to take the helm of the World Economic Forum, which organizes the annual Davos gathering. The ECB has insisted that Lagarde is “determined” to finish her term, which ends in 2027.
