Central Bank lowers interest rates for the 8th time amid concerns over global trade tensions impacting economic expansion.
The ECB's benchmark interest rate took a plunge by a quarter point, matching analyst expectations.
On a thunderous Thursday, the European Central Bank (ECB) slashed its key deposit rate by 25 basis points to a two-year low of 2%. This move also affected the interest rates on its main refinancing operations and the marginal lending facility, which were lowered to 2.15% and 2.40%, respectively, effective from June 2025.
The main refinancing operation rate is what banks pay when they borrow from the ECB for a week, while the marginal lending facility rate is the amount banks pay when they borrow from the ECB overnight. The deposit facility rate is the interest banks earn when they deposit money with the central bank overnight.
The ECB, in its statement, pointed out that while uncertainties surrounding trade policies may negatively affect business investment and exports, especially in the short term, the rising government investment in defence and infrastructure will gradually boost growth over the medium term. Higher real incomes and a robust labor market, along with better financing conditions, should make the economy more resilient to global shocks.
This rate cut aligns with expectations as easing price pressures provide the support. According to the ECB's new projections, headline inflation is expected to average 2.0% in 2025, 1.6% in 2026, and 2.0% in 2027. In May, the Eurozone's annual inflation rate came in below estimates at 1.9%, dipping from April's 2.2%. Core inflation, which excludes volatile food and energy prices, also saw a decline in May, settling at 2.4%, down from 2.7% in April.
The cooling has been swifter than the ECB anticipated earlier in the year, thanks in part to a surging euro – making imported goods cheaper, as well as lower-than-predicted energy costs. A softer labor market and supply increases, particularly from rerouted goods away from the US due to high tariffs, are expected to keep inflation in check in the coming months.
Economic growth projections for the Eurozone remain uncertain due to global trade disruptions caused by tariffs from the US administration and dampened consumer demand. However, the eurozone economy managed a respectable 0.3% growth in the first quarter of this year, surpassing expectations. Increased spending intentions on defence and infrastructure in Europe have fueled optimism for accelerated growth.
Germany's constitutional amendment to its debt brake rule means that defence spending beyond 1% of GDP will no longer be subject to borrowing limits. The government has also established a €500 billion extrabudgetary fund for additional infrastructure spending. These developments suggest that the rate cut on this day could be the last easy decision for the ECB's Governing Council. The market, as suggested by a note from ING, has priced in one more cut by the end of the year, bringing the deposit facility rate to 1.75%. The possibility exists for further cuts later on, but sentiment surrounding US-EU trade relations largely determines this, with tensions recently on the rise.
Sources:
- [1] "ECB's projection for eurozone inflation falls below 2%," ECB, May 2025.
- [2] "Regional economic outlook: Central and Eastern Europe," European Commission, May 2025.
- [3] "European Commission gives fiscal verdicts for member states, with defence looming large," Financial Times, May 2025.
- [4] "ECB lowers key deposit rate to 2%," Reuters, May 2025.
- [5] "Eurozone inflation falls below ECB 2% target in May," CNBC, May 2025.
In light of the European Central Bank's (ECB) reduced deposit rate, companies may expect improved financing conditions, possibly leading to modifications in their financial strategies. This move could also influence the business environment within the Eurozone, given the ECB's aim to boost growth through lower interest rates.
The ECB's anticipated easing of price pressures and lower inflation rates could impact various sectors of the business world, such as industries reliant on commodities, as well as sectors susceptible to fluctuations in consumer demand. This rate cut, paired with other fiscal measures like increased government investment in defence and infrastructure, may offer a more favorable financial landscape for businesses seeking growth opportunities in the Eurozone.
