Christine Lagarde, president of the European Central Bank (ECB), at the Hertie School in Berlin, Germany, on Monday, May 26, 2025.
Krisztian Sorry/Bloomberg Via Getty Images
The European Central Bank on Thursday announced a 25-basis-point interest rate trim and lowered its inflation expectations on the back of a stronger euro and lower energy costs.
This takes the deposit facility rate to 2%, down from a mid-2023 high of 4%. Ahead of the announcement, traders had been pricing in an almost 99% chance of the quarter-point cut according to LSEG data.
“In particular, the decision to lower the deposit facility rate – the rate through which the Governing Council steers the monetary policy stance – is based on its updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission,” the ECB said in its statement.
The pan-European Stoxx 600 held steady after the announcement, trading around 0.3% higher, while the euro was last up 0.2% against the dollar.
Euro zone inflation fell below the 2% ECB target rate in May, hitting a cooler-than-expected 1.9% according to preliminary data published earlier this week.
The ECB on Thursday also released its latest economic projections, saying it was now anticipating inflation to average 2% in 2025. This compares to a March forecast of 2.3%.
“The downward revisions compared with the March projections, by 0.3 percentage points for both 2025 and 2026, mainly reflect lower assumptions for energy prices and a stronger euro,” the central bank said.
Meanwhile, core inflation was revised upwards from the previous March estimate of 2.2%, to an expectation of 2.4% this year.
Economic growth however has continued to be lacklustre even as interest rates have eased. The latest estimate shows that in the first quarter of 2025, the euro zone expanded by 0.3%.
The central bank’s decision comes at a critical time for the euro zone economy as businesses and policy makers face increasing uncertainty in the wake of rising geopolitical tensions.
U.S. President Donald Trump’s tariff policy is a main concern, with the duties expected to weigh heavily on economic growth. Some of the sector-specific tariffs in particular could hit Europe hard as key industries like steel and autos are impacted.
The impact of tariffs on inflation is less clear and could depend on if, and how, the European Union strikes back, policymakers have said. Retaliatory measures from the EU are currently on pause, but the bloc’s leaders have said they are prepared to implement them if needed. Question marks also remain about how plans to ramp up defense spending across Europe could impact the economy.
This is a breaking news story, please check back for updates.
ECB Cuts Interest Rates: Expert Analysis on What It Means for You
Time.news Editor (TNE): Welcome, everyone, to Time.news. We’re facing an evolving economic landscape in the Eurozone, with the European Central Bank (ECB) recently announcing a significant interest rate cut. To help us unpack this decision and understand its implications, we’re joined today by Dr. Anya Sharma, a leading economist specializing in monetary policy. Dr. Sharma, thank you for being here.
Dr. Anya Sharma (AS): Thank you for having me.
TNE: dr. Sharma, let’s dive right in. The ECB lowered the deposit facility rate by 25 basis points to 2%.This was widely anticipated, but what’s the importance of this move in the broader economic context? What are the interest rate cut implications?
AS: This ECB interest rate cut is a response to a few key factors. Firstly, inflation in the Eurozone has fallen below the ECB’s target of 2%, hitting 1.9% in May. This gives the ECB some room to maneuver. Secondly, the ECB is likely concerned about the sluggish economic growth in the Eurozone; the 0.3% expansion in the first quarter is hardly robust. By lowering interest rates, the ECB aims to stimulate borrowing and investment, thereby boosting economic activity.
TNE: The article mentions that the euro became stronger and energy prices also got lower. Are these factors directly related to today’s announcement?
AS: Absolutely. The ECB specifically cited a stronger euro and lower energy prices as reasons for the downward revision of their inflation forecasts. A stronger euro reduces the cost of imported goods, helping to keep inflation in check. Lower energy prices have a similar effect. These factors provided the ECB with more confidence to enact the interest rate cut.
TNE: So, the ECB is now anticipating inflation to average 2% in 2025, a downward revision from their March forecast. However, core inflation has been revised upwards. What’s the difference, and why is this crucial?
AS: Headline inflation, the 2% figure, includes all goods and services.Core inflation excludes volatile items like energy and food. A higher core inflation rate,now expected at 2.4% this year, suggests that underlying inflationary pressures might be more persistent than initially thought. This makes the ECB’s job more complex. They need to stimulate growth, but they also need to keep a close eye on these underlying price pressures.
TNE: The article highlights concerns about US President Trump’s tariff policy and its potential impact on European growth. How might these tariffs influence the ECB’s future decisions? What about the EU retaliatory measure on pause?
AS: The threat of tariffs adds significant uncertainty. If the tariffs are implemented and weigh heavily on European industries, like steel and autos, it could further dampen economic growth. This would likely push the ECB towards further monetary easing. The paused retaliatory measures is an important consideration in this context. If the tariffs are implemented, then the retaliatory measures would directly impact how the EU responds. The ECB will be closely monitoring the situation and adjusting its policy response accordingly.
TNE: Dr. Sharma, what’s your advice to our readers – businesses and consumers – in light of this interest rate cut? What are some practical implications that they should be aware of?
AS: For businesses, this ECB interest rate cut could mean cheaper borrowing costs. Consider revisiting investment plans that may have been put on hold due to high interest rates. For consumers, lower interest rates could make mortgages and other loans more affordable. Though, it’s essential to remember that the economic outlook remains uncertain. Exercise caution and avoid taking on excessive debt. It is especially important to be conscious of the potential impacts to the euro rate in the future. Additionally,both businesses and consumers should closely monitor developments related to trade and geopolitical tensions,as these could significantly impact the economic landscape.
TNE: Dr. Sharma, thank you for providing such valuable insights. This has been incredibly helpful in understanding the nuances of the ECB’s decision and its potential impact on the Eurozone economy.
AS: My pleasure.
This article is for informational purposes only and does not constitute financial advice. Always consult with a qualified professional before making any financial decisions.
