The European Central Bank on Thursday announced a 25-basis-point interest rate trim and lowered its inflation expectations on the back of a stronger euro and lower energy costs.
This takes the deposit facility rate to 2%, down from a mid-2023 high of 4%. Ahead of the announcement, traders had been pricing in an almost 99% chance of the quarter-point cut according to LSEG data.
“In particular, the decision to lower the deposit facility rate – the rate through which the Governing Council steers the monetary policy stance – is based on its updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission,” the ECB said in its statement.
The pan-European Stoxx 600 held steady after the announcement, trading around 0.3% higher, while the euro was last up 0.2% against the dollar.
Euro zone inflation fell below the 2% ECB target rate in May, hitting a cooler-than-expected 1.9% according to preliminary data published earlier this week.
The ECB on Thursday also released its latest economic projections, saying it was now anticipating inflation to average 2% in 2025. This compares to a March forecast of 2.3%.
“The downward revisions compared with the March projections, by 0.3 percentage points for both 2025 and 2026, mainly reflect lower assumptions for energy prices and a stronger euro,” the central bank said.
Meanwhile, core inflation was revised upwards from the previous March estimate of 2.2%, to an expectation of 2.4% this year.
Economic growth however has continued to be lacklustre even as interest rates have eased. The latest estimate shows that in the first quarter of 2025, the euro zone expanded by 0.3%.
The ECB left its growth forecast for 2025 unchanged at 0.9% due to a stronger-than-expected first three months of the year paired with a weaker outlook.
“While the uncertainty surrounding trade policies is expected to weigh on business investment and exports, especially in the short term, rising government investment in defence and infrastructure will increasingly support growth over the medium term,” the ECB said.
The central bank’s decision comes at a critical time for the euro zone economy as businesses and policy makers face increasing uncertainty in the wake of rising geopolitical tensions.
U.S. President Donald Trump’s tariff policy is a main concern, with the duties expected to weigh heavily on economic growth. Some of the sector-specific tariffs in particular could hit Europe hard as key industries like steel and autos are impacted.
The impact of tariffs on inflation is less clear and could depend on if, and how, the European Union strikes back, policymakers have said. Retaliatory measures from the EU are currently on pause, but the bloc’s leaders have said they are prepared to implement them if needed. Question marks also remain about how plans to ramp up defense spending across Europe could impact the economy.