Key Takeaways
- The ECB is approaching the end of its rate cutting cycle.
- Most analysts expect a pause in July and a cut in September.
- Eurozone inflation is near its target, but geopolitics and trade barriers continue to pose hard-to-predict risks.
While most monetary policy observers agree that the European Central Bank is nearing the end of its rate-cutting cycle, the market is divided on whether one or two more cuts will follow this year—and how quickly they will come. After the ECB’s June 5 decision to lower interest rates by 0.25 percentage points, just four scheduled monetary policy meetings remain in 2025.
The June cut was the eighth since the easing cycle began a year earlier. In total, the ECB has halved its key deposit rate from 4% to 2% in just over a year, marking one of the fastest transitions from tightening to easing among major central banks in terms of both pace and magnitude.
The ECB’s Three Key Interest Rates
- Deposit facility rate: 2.00% (as of June 11)
- Main refinancing rate: 2.15%
- Marginal lending facility: 2.40%
With eurozone inflation back near the 2% target and borrowing costs easing, many analysts believe the ECB may be near its terminal rate—the level at which monetary policy is neither stimulating nor restricting the economy.
But geopolitical instability and unpredictable US trade policy complicate the outlook.
As of late June, swap markets reflect expectations of roughly one more ECB rate cut by year-end, with September seen as the most likely window. A move in July looks increasingly unlikely, as investors expect the ECB to wait for greater clarity on US trade policy under President Donald Trump and the next round of ECB staff projections, due in September.
Current pricing implies only a slim chance of a cut in July, while around 0.14 percentage points are priced in for September. By December, the implied deposit rate stands at about 1.70%, indicating markets anticipate one full cut ahead, but little beyond that.
Will the ECB Cut Rates to a Neutral Level?
Morningstar’s chief European markets strategist, Michael Field, believes the ECB may already be close to its final destination for this rate-cutting cycle. He notes that inflation is predicted to have risen by 2% in June and has been relatively stable at or around the central bank’s targeted level.
“This would indicate that the bank has found the equilibrium level of interest rates. Granted there may be some tinkering around the edges, but I would not expect major cuts or hikes unless economic conditions change materially in the second half the year.”
Field adds that a chart of interest rates across the major central banks over the last two years reveals stark discrepancy. “Rates in the UK and US are still north of 4%, while in the EU we are at half that level. I don’t think it’s been fully appreciated how fast and hard the ECB have cut rates over the last year.”
Carsten Roemheld, capital market strategist at Fidelity, sees some room for maneuver. “We expect the ECB to cut rates one or two more times by the end of the year, bringing the deposit rate down to 1.5%,” he says. “Given the still weak economic environment and current inflation expectations, such a strategy appears justified for now.”
“However, this would place the deposit rate below the so-called ‘neutral’ rate, which is still assumed to be around 2%. That would imply a more expansionary policy stance—in clear contrast to the US, where we expect a more restrictive approach with stable key interest rates through year-end.”
September Cut Most Likely, but Not Certain
Bastian Freitag, head of fixed income in Germany at Rothschild & Co Wealth Management, considers one further rate cut the most likely scenario but says whether this happens in July or September remains uncertain.
“We think a further 25 basis point cut in September is possible, following the release of new projections. But that will largely depend on how tariffs, growth, and inflation evolve,” he told Morningstar.
He notes that recent ECB communication, including remarks from executive board member Isabel Schnabel, suggests the ECB may pause in July and wait for updated macro-projections.
In a speech on June 24, ECB chief economist Philip Lane emphasized the need for flexibility and caution. The bank’s task of bringing inflation back to target is largely accomplished, he said, but that new geopolitical and trade-related uncertainties call for a cautious, data‑dependent, and flexible monetary policy. “As a result, precisely steering the future rate path is not possible,” Lane said.
ECB President Christine Lagarde echoed that stance on June 23, emphasizing that the ECB will set its interest rate policy ona meeting‑by‑meeting basis, with no pre‑commitment to any particular path. Future decisions, she said, will be guided by the inflation outlook, underlying price dynamics, and the strength of monetary policy transmission.
ECB Staff Forecasts June 2025
Inflation:
• 2.0 % in 2025 (versus 2.3 % in March)
• 1.6 % in 2026 (versus 1.9 %)
• 2.0 % in 2027 (unchanged)
Growth (GDP):
• 0.9 % in 2025 (unchanged)
• 1.1 % in 2026 (versus 1.2 %)
• 1.3 % in 2027 (unchanged)
Iran-Israel Conflict, Trade War Bring Uncertainty on Inflation
While inflation is near target, recent geopolitical shocks have added volatility to the outlook. The conflict in the Middle East appears to be on pause for now, and Brent oil prices, which had jumped by roughly 20 %, have returned to early June levels, easing inflationary pressures.
According to Deutsche Bank Research, a sustained USD 10 per barrel increase in oil prices adds roughly 0.25 percentage points to the harmonized index of consumer prices (HICP) within two to three months and 0.4 percentage points over 12 months. The ECB’s June forecasts had factored in a USD 10 decline in oil prices, potentially challenging the expected disinflation path.
Higher energy prices also represent a negative supply shock and thus reduce growth. For every USD 10 per barrel increase, the eurozone oil import bill rises by around EUR 40 billion, equivalent to a 0.25 % GDP loss.
How Do Interest 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 for yields.
Meanwhile, cash savings rates on bank accounts will likely decrease, to the detriment of savers. The rates that savers receive depend mostly on the deposit facility, which defines the interest banks receive for depositing money with the ECB overnight. Borrowers, by contrast, benefit from lower rates as consumer debt and mortgages become cheaper.
When Are the Remaining ECB Meetings in 2025?
• July 24, 2025
• Sept. 11, 2025
• Oct. 30, 2025
• Dec. 18, 2025
