By Jasmine Clarke, Senior Correspondent
On June 5, 2025, the European Central Bank (ECB) reduced its deposit facility rate by 0.25 percentage points to 2%, marking its eighth rate cut in the past twelve months. This move underscores the ECB’s response to steadily declining inflation rates and its concerns over the economic impact of escalating global trade tensions.
The reduction also saw adjustments to other key rates, with the main refinancing operations rate lowered to 2.15% and the marginal lending facility rate to 2.4%. This decision is part of a broader strategy to support the eurozone’s recovery from persistent economic sluggishness and to foster conditions conducive to long-term price stability.
A Strategic Move for a Cooling Economy
The latest interest rate cut reflects the ECB’s acknowledgement that inflation has finally returned to within acceptable bounds after years of volatility. As of May 2025, inflation across the eurozone was recorded at 1.9%, comfortably below the ECB’s 2% target. This marks a notable shift from the higher rates experienced in early 2024 and indicates that earlier monetary policy interventions are beginning to take hold.
The Governing Council, led by ECB President Christine Lagarde, reached the decision with near unanimity, reflecting a strong consensus among central bankers about the need to maintain support for the economy in light of ongoing uncertainties. Lagarde emphasized the importance of keeping inflation anchored around the 2% medium-term target while ensuring sufficient liquidity in the financial system.
Adjusted Economic Forecasts
In its quarterly projections, the ECB revised its inflation and growth outlooks. Inflation is now forecasted to average 2.0% in 2025, down from earlier estimates of 2.3%. For 2026 and 2027, the central bank projects inflation to stabilize at 1.6% and 2.0%, respectively.
These revisions are influenced by a combination of lower energy prices, subdued wage growth, and the strengthening of the euro, which collectively reduce import costs. This easing of inflationary pressures provided the ECB with the leeway to implement another rate cut without risking an overheated economy.
On the growth front, however, the ECB was less optimistic. The eurozone’s GDP growth projection for 2025 has been lowered to 0.9%, reflecting the dampening effects of external economic pressures and a slowdown in industrial production. Growth is expected to modestly rebound to 1.2% in 2026 and reach 1.3% in 2027.
Influence of Global Trade Dynamics
The ECB’s policy decision also comes at a time when global trade dynamics are increasingly volatile. Recent protectionist policies introduced by major trading partners, particularly new tariffs imposed by the United States on European exports, have raised concerns among eurozone policymakers.
These measures are expected to weaken export growth, especially in manufacturing-heavy economies like Germany. The ECB has signaled that it will closely monitor these developments and is prepared to adjust its policy stance if trade tensions escalate further.
Market and Investor Response
European equity markets responded positively to the rate cut, with major indices posting gains on expectations of continued monetary support. Investors interpreted the move as a signal that the ECB remains committed to stimulating growth and avoiding a return to economic stagnation.
Bond markets also reacted favorably, with yields on government securities falling across several eurozone countries. This suggests that investors anticipate low interest rates to persist for the foreseeable future, making fixed-income assets more attractive.
Meanwhile, the euro saw slight appreciation against major currencies, supported by the ECB’s clear communication and the relatively stable macroeconomic environment.
Looking Ahead
While the ECB has refrained from committing to a specific path for future rate changes, its forward guidance indicates a continued emphasis on data-dependent decision-making. The next monetary policy meeting in July 2025 will offer further clarity, particularly if inflation trends or trade disputes shift in the interim.
Some policymakers within the ECB have voiced caution, suggesting that the central bank should now pause to assess the impact of recent rate cuts. Others believe that further easing might still be required if growth continues to falter or inflation slips below target for an extended period.