The European Central Bank lowered interest rates for the eighth time in a year after inflation dipped beneath 2% and the economy suffered repeated blows from US tariffs.
The deposit rate was cut by a quarter-point to 2% — as predicted by all analysts in a Bloomberg survey.
“Inflation is currently at around the Governing Council’s 2% medium-term target,” the ECB said in a statement. “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.”
By denting confidence in the US and clouding global growth, President Donald Trump’s levies have strengthened the euro and brought energy costs down. While that’s speeding the retreat in inflation, some now fret that prices will undershoot the target — at least before Brussels hits back on tariffs and Europe ramps up military and infrastructure spending.
New quarterly projections from the ECB showed inflation below the target in 2026, at 1.6%. The economy is seen expanding a little less than before next year.
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European government bonds held gains after the decision, with the German 10-year yield about five basis points lower at 2.48%. Money markets added modestly to wagers on the extent of further rate cuts this year, with 33 basis points expected in total — equivalent to another quarter-point move and a one-in-three chance of an additional one. The euro erased gains versus the dollar to trade little-changed at US$1.1418 ($1.47).
President Christine Lagarde will elaborate on the outlook for Europe at a press conference at 2.45pm in Frankfurt.
Data this week showed inflation eased to 1.9% in May — falling below 2% for the first time in eight months and only the second since 2021. The slowdown was driven by softer gains in service-sector prices, a key concern for policymakers until recently.
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Wage growth has also cooled, underpinning assumptions that pay gains will moderate after catching up to inflation and help the ECB achieve its aim of price stability.
At the same time, anxiety about the economy has risen. The realisation that trade policies can shift drastically and with no warning has stifled investment and delayed household spending. A gauge of private-sector activity in the euro area barely grew last month, coming in just above the threshold separating expansion from contraction.
Most European Union exports currently face a 10% levy in the US, though that risks rising to 50% in July if negotiations fail. The relationship between Washington and Beijing also remains uncertain even after both sides lowered their duties from prohibitive levels.
Trade will feature among the top subjects for discussion when German Chancellor Friedrich Merz meets Trump later Thursday in the White House.
Economists polled before the ECB’s decision expect rates to stay on hold in July before a final cut in September — an outlook markets broadly agree with.
A likely source of discord in the months ahead is how to assess inflation risks down the line. Higher military expenditure — a topic NATO defense ministers are also debating Thursday — is seen by hawks like Executive Board member Isabel Schnabel as a possible upward driver of prices, alongside demographics and more fragmented supply chains.
