The European Central Bank reduced its key interest rate by 0.25 percentage points to 2.00% on Thursday, marking its eighth rate cut since June 2024. The expected monetary policy decision comes as eurozone inflation dipped to 1.9% in May, falling below the ECB’s 2% target for the first time since September 2024, largely due to declining energy prices and a slowdown in services inflation.
“Today’s rate cut was all but guaranteed given favorable inflation data released earlier this week, which points to a disinflationary process that remains underway in the eurozone,” says Grant Slade, international economist at Morningstar.
“Today’s statement from the ECB reaffirmed its ‘data-dependent’ approach to determining its policy stance. This reflects uncertainty on the part of the ECB as to whether further vigilance is required to truly win the war on inflation, while also leaving flexibility for further monetary easing should economic conditions amid a trade war warrant.”
The decision comes a day after the ECB and the European Commission gave Bulgaria the green light to join the euro in 2026, making it the single currency bloc’s 21st member after Croatia adopted the single currency in 2023.
“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 says in its press release.
“Inflation is currently at around the governing council’s 2% medium-term target.”
Changes to Key ECB Interest Rates
The ECB began its rate-cutting cycle in June 2024, paused in July, and resumed its rate changes in September for back-to-back cuts of 0.25 percentage points at every monetary policy meeting.
As of June 11, the three ECB key interest rates will stand at:
- Deposit facility rate: 2.00%
- Main refinancing rate: 2.15%
- Marginal lending facility: 2.40%
The ECB is the first major European Central Bank to make a monetary decision this month. On June 19, the Bank of England and the Swiss National Bank will announce monetary policy decisions. While inflation is still elevated in the UK and the BOE is expected to hold rates, Switzerland is battling deflation, and the SNB is seen cutting its key rate to 0% amid a strong franc and as inflation in May dipped to -0.1%. The US Federal Reserve will announce its monetary decision a day earlier, but is widely expected to hold steady despite mounting pressure from US President Donald Trump.
ECB Revises Inflation Outlook
ECB staff also revised its economic forecasts. Staff now see headline inflation averaging:
- 2.0 in 2025 (compared with 2.3% in its March forecast)
- 1.6% in 2026 (from 1.9%)
- 2.0% in 2027 (unchanged from March)
“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“, according to the press release.
ECB staff left their economic growth projections for the eurozone unchanged at:
- 0.9% in 2025 (unchanged from its March forecast)
- 1.1% in 2026 (from 1.2%)
- 1.3% in 2027 (unchanged)
“The unrevised growth projection for 2025 reflects a stronger than expected first quarter combined with weaker prospects for the remainder of the year”, according to the press release.
“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.”
With a gain of 0.3% in the first quarter over the fourth quarter, the eurozone economy expanded faster than expected three months ago, on the back of increased private consumption and front-loaded exports to the US in anticipation of US tariffs.
Manufacturing data also came in stronger than anticipated. Industrial production for the first quarter grew by 4.7%, mainly driven by significant US front-loading of eurozone goods ahead of higher tariffs.
“But even when taking front-loading out of the mix, it looks like eurozone manufacturing has been bottoming out,” says Carsten Brzeski of ING Bank.
“Recent surveys indicate more optimism about future production and better order books. Lower energy prices will surely help the more energy-intensive producers and announced German fiscal stimulus as well as European defense spending have both added to order books and general optimism.”
And after the massive stockpiling during the pandemic, there are signs of destocking.
“Normally, it is the combination of inventory reduction and improving order books that will boost production in the future,” he says.
Market Pricing Shifts on July Rate Cut
Swap markets have significantly revised their expectations for a July rate cut, now assigning only roughly a 20% probability compared with near-certainty last week. This marks a clear shift in sentiment, suggesting investors believe the ECB may pause after the initial June move.
Terminal rate expectations for the year-end have also edged higher, from 1.53% to 1.58%, indicating a shallower easing path. Terminal rate refers to the point where a central bank stops cutting or raising rates in the cycle, and usually coincides with inflation being at target. The market now sees additional cuts more likely to come in the fall or in December rather than over the summer.
Much will depend on how the trade war between the US and the European Union unfolds, says Felix Schmidt, senior economist at Berenberg Bank.
“We expect the two sides to reach at least a framework deal by early July. If so, a decrease in uncertainty coupled with higher fiscal spending toward the end of the year, particularly in Germany, will allow the eurozone economy to regain momentum later this year, following a soft patch now.”
Further ECB rate cuts to a deposit rate below 2% in the second half the year could stimulate the real economy at a time when additional demand support may no longer be required. The governing council would probably prefer inflation to slightly undershoot its 2% target temporarily rather than risk exceeding the inflation target again, Schmidt says.
“We do not expect the ECB to lower its deposit rate below 2% unless the trade war with the US escalates and the economy deteriorates as a result,” he adds.
When Are the Next ECB Meetings in 2025?
July 24, 2025
Sept. 11, 2025
Oct. 30, 2025
Dec. 18, 2025
