The European Central Bank (ECB) announced on Thursday a quarter-point reduction in its benchmark interest rates, bringing the rate on the deposit facility down to 2.0 percent. The rates on the main refinancing operations and the marginal lending facility were also cut to 2.15 percent and 2.4 percent, respectively. This decision marks the eighth rate cut since June 2024, amounting to a total reduction of two percentage points.

The rate cut comes as the ECB revised its inflation forecast downwards, with consumer price increases now expected to meet the central bank's 2 percent target this year (2025). According to its June staff projections, the ECB anticipates inflation in the euro area to be 2.0 percent in 2025, 1.6 percent in 2026, and 2.0 percent in 2027. The projections for 2025 and 2026 were revised down by 0.3 percentage points compared to the March forecast, indicating that inflation might undershoot the ECB's target in 2026. The central bank stated that "most measures of underlying inflation suggest that inflation will settle at around the Governing Council's 2 percent medium-term target on a sustained basis."

Regarding economic growth, the ECB maintained its forecast for 2025 at 0.9 percent. However, it slightly adjusted its projections for the following years, now expecting real gross domestic product (GDP) to expand by 1.1 percent in 2026 (revised down from 1.2 percent) and 1.3 percent in 2027. This reflects a more cautious outlook amid persistent economic headwinds.

A significant factor influencing the ECB's outlook is the "uncertainty surrounding trade policies," particularly the recent threat from US President Donald Trump to raise tariffs on European Union goods to 50%. The ECB warned that such policies are "expected to weigh on business investment and exports." Furthermore, the central bank cautioned that if trade tensions escalate, both inflation and growth could fall below their baseline projections, as indicated by a scenario analysis conducted by ECB staff.

Despite these external challenges, the ECB highlighted potential domestic strengths. It noted that "rising government investment in defence and infrastructure will increasingly support growth over the medium term." Additionally, the bank anticipates that "higher real incomes and a robust labour market will allow households to spend more," which, combined with "more favourable financing conditions," should enhance the economy's resilience to global shocks.

ECB President Christine Lagarde commented that policymakers were in a "good place" to manage economic uncertainty following the latest cut. She also hinted that the current cycle of monetary policy easing might be nearing its conclusion, stating, "I think we are getting to the end of a monetary policy cycle." This was the seventh consecutive reduction and the eighth cut since June 2024, part of the ECB's most aggressive rate-easing cycle since the 2008/2009 global financial crisis. The decision to cut rates was described as "virtually unanimous" among policymakers.

However, there are voices within the ECB advocating for a pause. Conservative policymakers, including ECB board member Isabel Schnabel, have pushed for a break to allow time to reassess how recent global upheavals might reshape the economic outlook. Despite these calls, the ECB reiterated that it would not commit to a particular rate path, emphasizing that future monetary policy decisions will be made on a meeting-by-meeting basis and will be data-dependent. Investors have reportedly been pricing in a pause in rate cuts for July, reflecting the mounting global and domestic uncertainty.