Christine Lagarde, president of the European Central Bank (ECB), at the Hertie School in Berlin, Germany, on Monday, May 26, 2025.
Krisztian Bocsi/Bloomberg through Getty Images
The European Central Bank announced on Thursday an adjustment of the interest rate of 25 basic points and reduced its inflation expectations in the back of a stronger euro and lower energy costs.
This takes the 2%deposit installation rate, below a maximum of mid -2023 of 4%. Before the announcement, merchants had been setting a price at almost 99% of point cutting possibilities according to LSE data.
“In particular, the decision to reduce the rate of the deposit installation, the rate through which the Governing Council directs the position of monetary policy, is based on its updated evaluation of the inflation perspective, the dynamics of the underlying inflation and the strength of the transmission of monetary policy,” said the ECB in his statement.
A member of the Governing Council did not support the decision to reduce rates, said the president of the ECB Christine Lagarde during a press conference after the announcement.
Paneuropeo Stoxx 600 Initially, it remained stable after the ad, before reducing profits to operate around 0.2% lower, while the euro was the one that was 0.6% more than a dollar.
Revised economic perspective
The inflation of the euro zone fell below the target rate of the ECB of 2% in May, reaching 1.9% fresher than expected according to the preliminary data published earlier this week.
The ECB also launched its last economic projections on Thursday, saying that it now anticipated that inflation averaged 2% in 2025. This compares with a March 2.3% prognosis.
“The downward reviews compared to the March projections, at 0.3 percentage points by 2025 and 2026, mainly reflect lower cases for energy prices and a stronger euro,” said the Central Bank.
Meanwhile, central inflation was reviewed up from the previous March estimation of 2.2%, to an expectation of 2.4% this year.
Lagarde, however, said that “the perspective for inflation in the euro area is more uncertain than usual.”
However, economic growth has remained mediocre even when interest rates have decreased. The last estimate shows that in the first quarter of 2025, the euro zone expanded by 0.3%.
Lagarde told Annette Weisbach of CNBC that growth in the first quarter “was clearly giving impulse to the growth we are seeing and anticipating by 2025.”
“It would not exclude that number of 0.3 review up,” he added.
However, the head of the ECB said it would be “crazy” to say that the Central Bank was confident, despite being in a “good place” after the tariff cut.
The ECB left its growth forecast by 2025 without 0.9% changes due to the first three stronger months of the expected of the year matched with a weaker perspective.
“While uncertainty about business policies is expected on business policies and exports, especially in the short term, the increase in government investment in defense and infrastructure will increasingly support medium -term growth,” said the ECB.
The decision of the Central Bank arrives at a critical moment for the economy of the euro zone, since companies and policy formulators face increasing uncertainty due to the increase in geopolitical tensions.
The tariff policy of the president of the United States, Donald Trump, is a main concern, with the duties that are expected to evaluate much about economic growth. Some of the specific rates of the sector in particular could affect Europe, since key industries such as steel and cars are affected.
The effect of tariffs on inflation is less clear and could depend on whether, and how, the European Union goes back, the political leaders have said. EU retaliation measures are currently in pause, but block leaders have said they are prepared to implement them if necessary. There are also questioning signs about how plans to increase defense expense in Europe could affect the economy.
Uncertain policy path ahead
The ECB on Thursday gave almost no indication of what could be on the horizon for interest rates, leaving analysts divided along the way ahead.
“While the ECB delivered a widely expected rate cut today, we would not have a follow -up next month,” said Irene Lauro, economist in the Schroders euro zone, in a note. As there are no signs that tariffs are weakening the economy so far, it now added a pause in the rate reduction cycle.
“With rates now at the midpoint of its estimated neutral range, the bar for more cuts has increased,” said Lauro. “The ECB can afford to move from urgency to patience.”
Others argued that rates should lower as inflationary pressures increase.
“With the inflationary pressures that ride rapidly and the growth of the winds against the winds against, the ECB is underestimating the risk of underestimation His goal, “said Natasha May, a global analyst on the JP Morgan Asset Management market.
Commercial tensions could have a greater impact on medium -term inflation instead of increasing prices, he said.
“While some members of the Governing Council advocate for a July break, the case for another rate cut is clear,” May added.
