Key Takeaways
- The ECB kept its deposit rate at 2%, marking a second pause since June’s cut, as inflation remains close to the 2% target.
- Policymakers gave no forward guidance, with markets split on whether a final cut could still come in December.
- ECB staff projections show little change to the inflation outlook, but growth forecasts for 2025 were revised higher.
The European Central Bank held its key interest rate steady at 2% on Thursday, marking a second straight pause in the rate-cutting cycle that began in June 2024. Market reaction was muted as the hold had been widely expected. The decision was unanimous, ECB president Christine Lagarde said.
The decision comes as eurozone inflation holds steady around the central bank’s 2% target. Consumer prices in the eurozone increased by 2.1% year over year in August, while core inflation, which shows prices without volatile components such as energy and food costs, rose 2.3% year over year.
“Inflation is currently at around the 2% medium-term target and the Governing Council’s assessment of the inflation outlook is broadly unchanged,” Lagarde said. “The new ECB staff projections present a picture of inflation similar to that projected in June.”
The central bank gave no forward guidance on interest rates. “The Governing Council is not pre-committing to a particular rate path”, the bank said.
Michael Field, Morningstar’s chief European market strategist, says the lack of market movement was to be expected, with investors shifting their attention to the US inflation number, which showed a rise to 2.9%.
Lagarde declined to comment on political developments in France, but stressed that eurozone sovereign bond markets are working “smoothly and orderly.”
What Are the Key ECB Interest Rates?
Since June 11, the three ECB key interest rates have been:
- Deposit facility rate: 2.00%
- Main refinancing rate: 2.15%
- Marginal lending facility: 2.40%
Thursday’s decision comes after a quarter-point cut in June and a hold in July, following eight cuts in just over a year.
The ECB is the first major central bank to set monetary policy this month. The US Federal Reserve and the Bank of England will announce their decisions next week, on Sept. 17 and 18 respectively, while the Swiss National Bank meets on Sept. 25.
Expectations for Fed interest rate cuts jumped on Sept. 5 in the wake of new data showing the US economy added just 22,000 jobs in August—far fewer than expected.
Is the ECB Done Lowering Rates in 2025?
While swap markets imply one more ECB rate cut in December, views among investors diverge. Konstantin Veit, portfolio manager at Pimco, argues that the ECB has already finished its cutting cycle, saying the bar for further action is quite high. Small deviations from the 2% inflation target will not sway policymakers, who would only move again with a strong justification.
Peter Vanden Houte, chief economist for the eurozone at ING, agrees. Lower energy prices are expected to exert downward pressure on headline inflation, likely pushing it below 2% between the fourth quarter and mid-2026. “Nevertheless, the ECB is likely to view this as a temporary undershoot”, he says. Longer-term inflation risks remain tilted to the upside. “As a result, we expect the ECB to maintain its key interest rate at 2% over the coming year. A faltering recovery or a broader financial crisis– potentially triggered by political instability in France– could still prompt rate cuts, but this is not our base case."
Others see room for at least one more cut before year-end. Tuan Huynh, interim chief investment strategist for Germany, Austria, Switzerland and Eastern Europe at BlackRock Investment Institute, expects the deposit rate to fall to 1.75% in December, calling an October move premature given the lagging macroeconomic data. DWS also sees scope for a final cut this year, with senior economist Ulrike Kastens pointing to resilient growth, a largely robust labor market, and inflation close to target as reasons for the ECB to hold off until December rather than act earlier.
ECB Inflation Outlook Largely Unchanged, But Growth Outlook Higher
ECB staff also revised their economic forecasts. Staff now see headline inflation averaging:
- 2.1% in 2025 (compared with 2.0% in its June forecast)
- 1.7% in 2026 (from 1.6%)
- 1.9% in 2027 (from 2.0%)
For core inflation, which excludes energy and food prices, they expect an average of 2.4% in 2025, 1.9% in 2026 and 1.8% in 2027.
The ECB raised near-term headline inflation forecasts slightly, implying a shallower undershoot in 2026, says Mark Wall, chief European economist at Deutsche Bank.
But lower core forecasts for 2027 point to a longer undershoot, with dovish implications.
“The ECB describes the inflation outlook as ‘broadly unchanged’ and the statement is quite succinct. The ECB isn’t rushing to judgement on the 2027 number. The rates pause likely continues,“ he says.
ECB staff changed their economic growth projections for the eurozone to:
- 1.2% in 2025 (compared with 0.9% in its June forecast)
- 1.0% in 2026 (from 1.1%)
- 1.3% in 2027 (unchanged)
How Do Rate Cuts Affect Investors?
Equity markets tend to rise on anticipated rate cuts. In bond markets, falling interest rates mean lower yields, which pushes bond prices higher. Lower rates also make existing bonds (particularly those already issued during a period of high rates) more attractive on yields.
Meanwhile, savings account rates will fall, which impacts cash savers. In contrast, borrowers benefit as consumer debt and mortgages become cheaper.
“Investors will not be overly disappointed that the incremental cuts to rates will remain halted”, says Morningstar’s Field. “2% represents a very reasonable level for interest rates, one which should be very supportive of businesses across Europe looking to borrow and invest in the coming months and could potentially bolster equity markets here.”
When Are the Next ECB Meetings in 2025?
- Oct. 30
- Dec. 18
