FRANKFURT – The European Central Bank lowered its key interest rates on Thursday in line with market expectations as policymakers grapple with a range of possible outcomes from the trade war.
The bank announced a 25-basis point cut in its key interest rates, which decreased the deposit rate to 2.00% and the overnight repurchasing rate to 2.15%.
EUR/USD took a slight bid on the news, backtracked, and then surged half a cent to above 1.149 during the post-decision press conference as analysts cosied up to the possibility that ECB rate cuts could be on pause for a while.
The bank reiterated plans to remain data dependent, ie base its monetary policy on economic indicators. Tariffs introduced by US President Donald Trump – sometimes with little warning – have fuelled uncertainty in trading pits and boardrooms, with investors and managers watching policy shift on a whim. For example, Trump indicated late last week that he wanted to double US steel and aluminium tariffs to 50%; the policy went into effect yesterday.
Considering the current shaky international business environment, the ECB surprised observers by holding its growth outlook for this year at 0.9%, its March projection. The bank cited better-than-expected first quarter GDP improvement of 0.3% q/q and “weaker prospects for the remainder of the year.” It noted that expansion is expected at 1.1% in 2026 – down from the previous 1.2% estimate – and 1.3% in the following year, which matched the previous prediction.
During Thursday’s press conference, ECB President Christine Lagarde said she could not exclude the chance that the Q1 GDP measure could be revised higher. She also cited plans for increased defence and infrastructure spending in some member nations as examples of upcoming support for the economy.
However, the risks to growth “are tilted to the downside,” she warned.
Compared to its March report, the ECB lowered its euro area inflation outlook by three-tenths of a percentage point for both this year and next, dropping the former to 2.0% – the bank’s medium-term target – and the latter to 1.6%. Staff predicted 2027 consumer price growth at 2.0%.
Euro area headline annual inflation fell to 1.9% last month and below the ECB target, according to a preliminary report from the Eurozone statistics office Eurostat.
“A further escalation of trade tensions over the coming months would result in growth and inflation being below the baseline projections,” the bank explained. “By contrast, if trade tensions were resolved with a benign outcome, growth and, to a lesser extent, inflation would be higher than in the baseline projections.”
Was that it for rate cuts?
Some analysts found themselves caught between the bank’s statements following the decision and what the ECB president had to say later in the day, with more than one recanting their forecast of another reduction in the works.
“Lagarde’s comments during today’s press conference suggest that the ECB is in no hurry to continue cutting rates,” ING’s Carsten Brzeski wrote. “For now, the ECB sees the acceleration of disinflationary pressure mainly as transitory due to energy prices and the stronger euro.
“Unless trade tensions return with a vengeance, be it at the end of the current 90-day pause or at another time, we suspect that the ECB will stick to a wait-and-see approach over the summer. It will take a bit longer to understand whether the current disinflationary risks are merely one-offs or whether they signal a broader trend.”
Traders backed down from their slight leaning toward a September cut prior to the decision, with the swap market no longer showing the likelihood of such a reduction. Thursday’s cut was the eighth since the bank began lowering rates around this time last year.
“We are getting to the end of the monetary-policy cycle,” Lagarde said late in the press conference, with observers calling her comments hawkish.
The bank chief also responded to speculation that she might leave her job to take charge of the World Economic Forum before her ECB tenure is scheduled to end in the autumn of 2027. “I’m determined to complete my term,” she told journalists.
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- Bank lowers inflation outlook
- 2025 growth forecast upheld
- Data-dependent mode continues
- Analysts see hawkish shift
- Cut cycle approaches end
- President Lagarde “determined” to finish term
By Eric Culp
European Editor, LiveSquawk News
@eculp.bsky.social
@EricCulpLS
5 June 2025 | 15:45 GMT
FRANKFURT – The European Central Bank lowered its key interest rates on Thursday in line with market expectations as policymakers grapple with a range of possible outcomes from the trade war.
The bank announced a 25-basis point cut in its key interest rates, which decreased the deposit rate to 2.00% and the overnight repurchasing rate to 2.15%.
EUR/USD took a slight bid on the news, backtracked, and then surged half a cent to above 1.149 during the post-decision press conference as analysts cosied up to the possibility that ECB rate cuts could be on pause for a while.
The bank reiterated plans to remain data dependent, ie base its monetary policy on economic indicators. Tariffs introduced by US President Donald Trump – sometimes with little warning – have fuelled uncertainty in trading pits and boardrooms, with investors and managers watching policy shift on a whim. For example, Trump indicated late last week that he wanted to double US steel and aluminium tariffs to 50%; the policy went into effect yesterday.
Considering the current shaky international business environment, the ECB surprised observers by holding its growth outlook for this year at 0.9%, its March projection. The bank cited better-than-expected first quarter GDP improvement of 0.3% q/q and “weaker prospects for the remainder of the year.” It noted that expansion is expected at 1.1% in 2026 – down from the previous 1.2% estimate – and 1.3% in the following year, which matched the previous prediction.
During Thursday’s press conference, ECB President Christine Lagarde said she could not exclude the chance that the Q1 GDP measure could be revised higher. She also cited plans for increased defence and infrastructure spending in some member nations as examples of upcoming support for the economy.
However, the risks to growth “are tilted to the downside,” she warned.
Compared to its March report, the ECB lowered its euro area inflation outlook by three-tenths of a percentage point for both this year and next, dropping the former to 2.0% – the bank’s medium-term target – and the latter to 1.6%. Staff predicted 2027 consumer price growth at 2.0%.
Euro area headline annual inflation fell to 1.9% last month and below the ECB target, according to a preliminary report from the Eurozone statistics office Eurostat.
“A further escalation of trade tensions over the coming months would result in growth and inflation being below the baseline projections,” the bank explained. “By contrast, if trade tensions were resolved with a benign outcome, growth and, to a lesser extent, inflation would be higher than in the baseline projections.”
Was that it for rate cuts?
Some analysts found themselves caught between the bank’s statements following the decision and what the ECB president had to say later in the day, with more than one recanting their forecast of another reduction in the works.
“Lagarde’s comments during today’s press conference suggest that the ECB is in no hurry to continue cutting rates,” ING’s Carsten Brzeski wrote. “For now, the ECB sees the acceleration of disinflationary pressure mainly as transitory due to energy prices and the stronger euro.
“Unless trade tensions return with a vengeance, be it at the end of the current 90-day pause or at another time, we suspect that the ECB will stick to a wait-and-see approach over the summer. It will take a bit longer to understand whether the current disinflationary risks are merely one-offs or whether they signal a broader trend.”
Traders backed down from their slight leaning toward a September cut prior to the decision, with the swap market no longer showing the likelihood of such a reduction. Thursday’s cut was the eighth since the bank began lowering rates around this time last year.
“We are getting to the end of the monetary-policy cycle,” Lagarde said late in the press conference, with observers calling her comments hawkish.
The bank chief also responded to speculation that she might leave her job to take charge of the World Economic Forum before her ECB tenure is scheduled to end in the autumn of 2027. “I’m determined to complete my term,” she told journalists.
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