The European Central Bank on Thursday delivered a widely expected quarter-point rate cut, lowering its deposit facility rate to 2% from a peak of 4% in mid-2023, and revised its inflation projections downward for the year.
In a statement accompanying the decision, the ECB said the move was guided by its latest assessment of the inflation outlook, underlying price dynamics, and the continued strength of monetary policy transmission.
“Inflation is currently at around the Governing Council’s 2% medium-term target,” the central bank said in a statement on Thursday.
Preliminary data published earlier this week showed euro zone consumer prices rising 1.9% in May, falling below the ECB’s 2% target and coming in softer than expected.
The 25-basis-point cut was fully priced in by markets ahead of the announcement, with LSEG data showing a near-99% probability of the move.
Analysts are now watching closely for guidance on future policy adjustments, particularly as the ECB balances softer inflation with ongoing geopolitical and fiscal risks.
New quarterly projections from the European Central Bank (ECB) show inflation falling below the 2% target by 2026, with a forecast of 1.6%.
The updated outlook also points to slightly weaker economic growth for next year compared to previous estimates.
Growth remains tepid as geopolitical uncertainty looms
While inflation appears to be under control, the region’s economic recovery remains fragile.
Eurostat’s latest estimate pegged first-quarter GDP growth in the euro zone at 0.3%, reflecting continued weakness across several sectors.
The ECB’s move comes amid a backdrop of rising geopolitical tensions that could complicate the region’s economic trajectory.
In particular, concerns are mounting over US President Donald Trump’s tariff agenda, which analysts say could significantly impact European exporters, especially in the steel and automotive sectors.
While the inflationary impact of tariffs remains uncertain, policymakers have acknowledged the risk of retaliatory measures from the European Union.
Though currently on hold, EU leaders have indicated they are prepared to act if necessary.
At the same time, proposed increases in defense spending across member states add another layer of uncertainty to the economic outlook, with unclear implications for fiscal stability and investment flows.
ECB President Christine Lagarde is scheduled to elaborate on the projections and the central bank’s broader economic outlook during a press conference at 2:45 pm local time in Frankfurt.
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