ECB Cuts Rates, As Current Monetary Cycle Nears Its End

The European Central Bank lowered its key deposit rate by 25 basis points to 2% on Thursday, marking the eighth cut since June last year.

The decision may prove to be the final act in its most aggressive easing cycle since the 2008 global financial crisis, when it cut seven times between October 2008 and May 2009.

"I think we are getting to the end of a monetary policy cycle that was responding to compounded shocks, including Covid, the illegitimate war in Ukraine, and the energy crisis," ECB President Christine Lagarde said at a press conference in Frankfurt.

Lagarde called the decision "nearly unanimous" as the sole dissenting voice was Austria's Robert Holzmann.

The ECB and the Federal Reserve have taken divergent paths in their monetary policies. The ECB has aggressively cut rates, while the Fed has made no cuts in 2025, holding its federal funds rate steady at 4.25%–4.5% since December 2024.

In comparison, in 2008, the ECB initially hiked rates to 4.25% in July, before reversing course in October, eventually arriving at 1% in May 2009. Meanwhile, the Federal Reserve was more aggressive, slashing rates from 5.25% in 2007 to near zero by December 2008 and launching quantitative easing.

Inflation Data-Supported Rate Decision

Eurostat's latest flash estimate showed that annual inflation in the eurozone fell to 1.9% in May, down from 2.2% in April.

Core inflation, which excludes volatile energy and food prices, also moderated to 2.4% from 2.7%. Services inflation—a key driver in recent months—declined notably to 3.2%, its lowest level since early 2023.

"We are in a good position on the basis of the current trade path and with the 25 basis point cut that we decided, so that we can face the uncertainties that are coming our way," Lagarde noted.

With eurozone inflation now back at the ECB's 2% target and growth projections holding steady, the ECB will have a "meeting-by-meeting" stance in the future.

Sources close to the Governing Council confirmed to Reuters that the ECB In July meeting will likely pause, with little new data available to justify further action before autumn.

Markets See July Pause Despite Inflation Headwinds

Markets had a mixed reaction. While fully priced in, investors had anticipated a slightly more dovish tone.

"Markets were hoping—in our view somewhat unreasonably—for an even more dovish outcome, which led yields to sell off and the euro to strengthen," Kaspar Hense, senior portfolio manager at RBC BlueBay, said.

Outside of the bond market, the reaction was mild.

The EuroStoxx 50 index dropped about 1.05% before paring most of the losses. The euro gained around 0.5% against the US dollar and the British pound before fully retracting.

ECB Rate Cuts Should Boost Euro Area GDP

A rate cut should help the sluggish euro area recovery. Real GDP rose by just 0.3% in the first quarter of 2025, with growth forecast set at 0.9%. The ECB trimmed the medium-term inflation forecast to 2%.

“The ECB looks to be in an enviable position," Hussain Mehdi, director at HSBC Asset Management, said. "Underlying inflation is back at pre-Russia/Ukraine levels and disinflation looks set to continue amid a stronger euro and lower oil and gas prices."

Tariffs may also help "keep prices in check, given they weigh on demand,” Mehdi said. This could result in more Chinese goods diverted from the US to Europe,” he added.

US President Donald Trump agreed in May to delay imposing a 50% tariff on European Union (EU) goods until July 9, following a phone call with European Commission President Ursula von der Leyen. He had announced the hike along with frustration with the EU.

The ECB warned that trade tensions, if realized, would depress exports and investment, while increased government spending and defense outlays could lead to higher inflation in the longer term.

"Uncertainty surrounding trade policies is expected to weigh on business investment and exports," the statement read.

The economic sentiment indicator in the Euro Area increased for the first time in three months in May, according to data from Trading Economics. The index rose to 94.8 in May 2025 from an upwardly revised 93.8 in April, and above forecasts of 94.

However, the reading remains below its long-term average of 100.

Bulgaria's Euro Accession Set for 2025

Separately, Lagarde concluded her remarks with a nod to the eurozone's future, welcoming Bulgaria. The country may adopt the euro as its currency by 2025.

"We're looking forward to welcoming Bulgaria into the fold," she said, in a symbolic moment that signaled ongoing integration despite global fragmentation.

Bulgaria's entry would mark the first eurozone enlargement since Croatia in 2023, at the time of renewed focus on economic cohesion across the bloc.

While the nation has met key convergence criteria, final approval will depend on further inflation control and legislative alignment with eurozone standards.

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