ECB decreases rates in June

Central Bank extends monetary policy easing cycle: At its meeting on 4–5 June, the Governing Council decided to lower its deposit rate by 25 basis points to 2.00%. It also cut its refinancing and lending rates by the same amount. The move marked the seventh consecutive interest rate reduction and aligned with market expectations.

Lower inflation enables rate cut: The key domestic factors influencing the Central Bank's decision included the current inflation rate—now close to the 2.0% target—and the updated staff projections for inflation. The ECB now forecasts inflation to average 2.0% in 2025 and 1.6% in 2026, down from 2.3% and 1.9%, respectively, in March. The downward revision reflects lower energy prices and a stronger euro stemming from U.S. protectionism. Meanwhile, the Central Bank did not alter its GDP growth projections as a stronger-than-expected Q1 performance offset a bleaker outlook for the rest of the year.

ECB to cut again this year: President Lagarde clearly signaled that there is little scope for further interest rate cuts, stating, “with today's cut at the current level of interest rates, we believe that we are in a good position to navigate the uncertain conditions that will be coming up” and adding, “we are getting to the end of the monetary policy easing cycle.” That said, the vast majority of our panelists expect the Bank to lower rates further in a bid to support the economy in the face of rising global trade tensions, with the Consensus pointing to a final 25 basis points cut in Q3. The next meeting is scheduled for 23–24 July.

Panelist insight: ING’s Carsten Brzeski expects a 25 basis points cut in Q3: “As much as the ECB today tried to give the impression that the job of bringing back inflation is basically done, the risk of some aftershocks from recent developments on growth and inflation should provide enough room for at least one more rate cut after the summer. Unless trade tensions escalate again, the often mentioned direction of travel for the ECB over the summer is clear: vacation, before cutting rates once more in September.” Meanwhile, Nomura analysts project a cumulative reduction of 50 basis points this year: “Lagarde was more hawkish in the press conference than we had expected. Moreover, the ECB’s new HICP inflation forecasts, broadly in line with inflation fixings in the near term, raise the bar for back-to-back rate cuts in July and September. Consequently, we change our ECB call and now expect the ECB to cut rates by 25bp in September and December. We maintain, however, our terminal depo rate view of 1.50%.”

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