Key Takeaways
- Markets expect one more rate cut this year
- Policymakers note trade disputes, strong euro.
- Inflationary pressures are easing, ECB says.
The European Central Bank held its key interest rate steady at 2.00% on Thursday, marking a pause in the rate cutting cycle that began in June 2024. The widely expected monetary policy decision comes as eurozone inflation holds steady around the central bank’s 2% target, supported by falling energy prices and a slowdown in services inflation.
“Domestic price pressures have continued to ease, with wages growing more slowly. Partly reflecting the Governing Council’s past interest rate cuts, the economy has so far proven resilient overall in a challenging global environment. At the same time, the environment remains exceptionally uncertain, especially because of trade disputes,” according to the ECB’s press release.
The central bank did not provide explicit forward guidance on the future path of interest rates and repeated a data-dependent and meeting-by-meeting approach.
Is 2% a Reasonable Level for Eurozone Interest Rates?
“The ECB’s calls on interest rates have been a large success, cutting fast and hard over the last year or so, particularly considering recent criticism of the US Federal Reserve by the current administration,” says Michael Field, Morningstar’s chief European market strategist.
“Investors will not be disappointed that the incremental cuts to rates have come to a halt: 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.”
Dave Chappell, senior fund manager at Columbia Threadneedle, says: “The easing door was abruptly closed at the last ECB meeting, when President Lagarde unambiguously stated that, for now at least, the policy destination had been reached.
“However, with the euro area still scrambling to reach some form of trade agreement with the US ahead of the August 1 deadline, and the euro retaining its recent strength, the risks to growth and inflation appear to the downside in the near term before Germany’s fiscal support kicks in.
“While markets see just one more 25 basis point rate cut before year end, the ECB may find that its policy destination is nothing more than a brief stopover.”
What Are the Key ECB Interest Rates?
As of June 11, the three ECB key interest rates are:
- 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, which marked the eight rate cut in just over a year. The US Federal Reserve and the Bank of England opted to keep rates steady in June, while the Swiss National Bank cut its rates to 0%.
Is the ECB Rate-Cutting Cycle Coming to an End?
ECB officials had been damping down expectations of an imminent interest rate cut and swaps markets assigned a very low probability of a cut in July.
“Our interest rates are in a good place, and the bar for another rate cut is very high,” ECB executive board member Isabel Schnabel said in a recent interview with Econostream Media.
“There would only be a case for another rate cut if we saw signs of a material deviation of inflation from our target over the medium term. And at the moment, I see no signs of that,” she added.
What Do Policymakers Think About the Strong Euro?
The ECB appears broadly comfortable with the euro’s appreciation against the US dollar, which reflects Europe’s improving growth outlook and market assessment of the tariff impact.
“The current situation risks undermining the exorbitant privilege of the US dollar - a privilege the United States has enjoyed over many decades,” said ECB’s Schnabel.
“This offers a historic chance for the euro area to strengthen the euro’s international role as a global reserve, invoicing, and funding currency.”
Carsten Brzeski, global head of macro at ING, sees the euro becoming prominent in the ECB’s policy discussion, especially as the vice president, Luis de Guindos, mentioned a specific level for the euro against the dollar: $1.20, against the current level of $1.17.
Beyond this exchange rate, “things could become more complicated,” Brzeski wrote in a July 22 note.
“We wouldn’t take this comment at face value, as the rate of change generally matters more than a specific level for central banks. But Guindos hasn’t been the only governing council member willing to put the exchange rate on the table, and ... the euro is very strong on a trade-weighted basis,” Brzeski added.
“We think a relatively quiet July meeting could feature some heightened scrutiny on how comfortable policymakers would be with another euro rally. FX considerations may not make their way to official communication, but could help tilt the balance to a more dovish overall tone.”
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 on yields.
Meanwhile, savings account rates will fall, which impacts cash savers. Borrowers, by contrast, benefit, as consumer debt and mortgages become cheaper.
When Are the Next ECB Meetings in 2025?
- Sep. 11, 2025
- Oct. 30, 2025
- Dec. 18, 2025
