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Investing.com - The European Central Bank slashed interest rates at its latest policy meeting on Thursday as expected, bringing its key deposit rate down by 25 basis points to 2.0%, although officials did not provide outright guidance for changes later this year.
In a statement, the ECB said its decision to lower borrowing costs for the eighth time since last June comes as the euro area economy faces waning inflation but persistent uncertainty around the impact of global trade tensions.
Thursday’s cut was widely anticipated by markets, meaning that much of the debate among analysts heading into the announcement swirled around the central bank’s plans for rates over the rest of the year. Particularly with inflation easing back down to the ECB’s 2% target, some investors have bet that policymakers will push pause on the rate-reduction cycle in July and potentially roll out one more drawdown before the end of 2025.
"We forecast one more rate cut in the second half of the year with risks skewed towards deeper cuts," said Jack Allen-Reynolds, Deputy Chief Euro Zone Economist at Capital Economics, in a note following the decision.
Officials did not provide any specific rate guidance in their statement, but ratcheted down their expectations for future price gains. Estimates for headline inflation in 2025 and 2026 were lowered to 2.0% and 1.6%, respectively, a drop of 0.3 percentage points compared to the ECB’s projections in March. Inflation is seen returning to 2.0% in 2027.
Speaking at a press conference, ECB President Christine Lagarde added that the ECB is "not pre-committing to a particular rate path".
"We are in a good position on the basis of the current rate path and with the 25 basis points cuts that we decided, so that we can face the uncertainties that are coming our way," Lagarde said.
"But [...] we will decide meeting-by-meeting on the basis of data, and we will assess as and when data come in whether or not that position is secure in order to deliver on our [...] medium-term [inflation] target."
Consumer price inflation in the 20 countries using the euro eased to 1.9% in May, thanks to sliding energy prices and declining services costs. In the prior month, the figure came in at 2.2%. So-called "core" inflation, which strips out volatile items like food and fuel, decelerated to 2.3% from 2.7%, data from Eurostat, the European Union’s statistics agency, found.
The ECB also left its growth projections for 2025 unchanged, anticipating average gross domestic product expansion of 0.9%. While the first quarter was stronger than expected, the central bank flagged that the euro zone’s prospects for the remainder of the year are "weaker".
Murkiness is also surrounding the impact of U.S. President Donald Trump’s tariff plans. The White House has especially targeted the European Union -- which includes several euro zone countries -- with elevated so-called "reciprocal" levies. The ECB warned that the uncertainty may weigh on business investment and exports in the short term, although medium-term growth is tipped to be bolstered by increased government spending on defense and infrastructure.
"Inflationary pressures in the euro zone are receding faster than expected. Not only did [...] Trump make the European economy great again -- for one quarter, as frontloading of exports and industrial production boosted economic activity -- he also made inflation almost disappear," said Carsten Brzeski, Global Head of Macro (BCBA:BMAm) at ING, in a note.
Trump referenced the ECB’s rate-cutting campaign earlier this week in a social media post urging Federal Reserve Chair Jerome Powell to bring borrowing costs down at a faster pace. The Fed drew down rates by one percentage point in 2024, but has left them unchanged since December, noting that the tariff turmoil could place renewed upward pressure on inflation in the U.S.
By 09:22 ET (13:22 GMT), the euro had strengthened against the U.S. dollar by 0.5% to $1.1480.