The European Central Bank (ECB) lowered its interest rates on Thursday for the eighth time in a year, navigating through the uncertainty posed by Donald Trump’s tariff threats and their impact on Eurozone inflation and growth.
The deposit rate, the main benchmark tool, was reduced by a quarter-point to 2.0%, a level the institution led by Christine Lagarde no longer considers punitive for the economy.
Since June 2024, declining inflation in the Eurozone has allowed the Frankfurt-based institution to ease rates, reversing a monetary tightening cycle that began two years before to curb soaring prices, which saw the deposit rate peak at a record 4.0%.
This marks the seventh consecutive rate cut since last September, the ECB noted on Thursday. It comes at a time when inflation is around the target of 2%.
Concerns are now focused on the persistent weakness in economic activity across the twenty Eurozone countries, where sluggish demand could lead to deflationary effects.
The uncertainty surrounding trade policies is expected to dampen investment and exports in the short term, but increased public investments and a robust labour market should support growth and consumption, making the economy more resilient to global shocks, according to the ECB.
The major threat arises from US President Donald Trump, who consistently criticises the significant trade surplus with the United States and maintains high uncertainty about the magnitude of the impending shock. His ultimatum on imposing 50% tariffs on European goods expires on 9 July.
Given the current, exceptionally uncertain environment, the ECB will continue to respond on the basis of “data,” examining outcomes “meeting by meeting.” the bank stressed in a statement.
Data collected since the bank’s last meeting in April supported Thursday’s decisions: Inflation dropped to 1.9% in May in the Eurozone, a significant slowdown, falling below the ECB’s 2% target.
This decrease is mainly due to falling energy prices. However, even when excluding energy and other volatile food prices, core inflation slowed to 2.3% in May, from 2.7% in April.
The ECB also noted that wage growth “remains strong but continues to moderate significantly,” easing fears of “second-round” effects on prices.
New macroeconomic forecasts released on Thursday are expected to provide cues on future monetary policy.
The ECB downgraded its inflation forecasts for 2025 and 2026 due to the drop in energy prices and a stronger euro. It also lowered its economic growth forecast for 2026.
For this year, the Frankfurt-based institution has adjusted its inflation forecast to its target of 2.0%, down from a previous 2.3%.
This indicator is expected to fall to 1.6% in 2026 and return to 2.0% in 2027.
Eurozone GDP is projected to grow by 0.9% in 2025, as estimated in March, but only by 1.1% next year, instead of the previously predicted 1.2%, due to “uncertainty” related to President Trump’s tariffs.
The series of rate cuts in the Eurozone contrasts with the stance of the US Federal Reserve (Fed), which is keeping rates above 4% owing to concern that Trump’s measures may reignite inflation in the United States.
