The European Central Bank (ECB) implemented its eighth interest rate cut on Thursday, June 5, 2025, reducing key policy rates to their lowest levels since December 2022. This move, part of a broader effort to scale back restrictive monetary measures, has prompted discussions about the future direction of the ECB's policy, with ECB President Christine Lagarde signaling that the central bank may be approaching the end of its current rate-cutting cycle.

The latest decision brought the rate on the deposit facility down to 2 percent, while the rates on the main refinancing operations and the marginal lending facility were lowered to 2.15 percent and 2.4 percent, respectively. Since June 2024, the ECB has cumulatively lowered interest rates by 200 basis points, marking a significant reversal from a previous aggressive rate hike cycle that had added 450 basis points to interest rates over 14 months to combat high inflation in the euro area.

ECB President Christine Lagarde commented that the recent cuts have placed the central bank "in a good position." She expressed confidence that most measures of underlying inflation suggest inflation will settle around the Governing Council's 2 percent medium-term target on a sustained basis. While indicating that the ECB is "getting to the end of a monetary policy cycle that was responding to compounded shocks," Lagarde cautioned that victory against inflation is not yet claimed, stating "there is always another battle," and affirmed the ECB's determination to ensure inflation stabilizes sustainably at its target.

Despite the recent easing, ECB policymaker Martins Kazaks has advocated for a pause in the rate-cutting trajectory. He argued that the ECB should stop reducing interest rates at every meeting and instead "keep its powder dry" given the uncertain economic outlook, which includes challenges from erratic U.S. economic and trade policies. Kazaks emphasized the value in maintaining "policy space" for potential future cuts if economic conditions necessitate them.

Kazaks suggested that the market should not expect continuous rate cuts at every meeting. Regarding the ECB's next gathering in July, he indicated a pause might be appropriate, stating, "We don't get much data between now and the July meeting so it may well be the case that we pause." However, he warned against any firm commitment or "forward guidance" due to the highly uncertain and rapidly changing political landscape, noting "forward guidance isn't your friend in these circumstances." He further clarified that any subsequent cuts, should they occur while inflation is projected to remain at 2% in the medium term, would likely be small, "fine-tuning" moves.

The backdrop to these policy discussions includes recent inflation data showing a drop in euro area inflation to 1.9 percent in May from 2.2 percent in April. The ECB's new staff projections, published in June, forecast inflation at 2 percent in 2025, dipping to 1.6 percent in 2026, before returning to 2 percent in 2027. The projections for 2025 and 2026 were revised down by 0.3 percentage points from March. President Lagarde noted that it is acceptable for inflation to fluctuate around the 2 percent target.

While welcoming the new forecasts, Kazaks warned that the projected dip in inflation in 2026, attributed by the ECB to a stronger euro and cheaper fuel, necessitates vigilance. "We are in a good place, we have delivered inflation at 2%, but it's important to maintain it at around 2%," he said, underscoring the need to monitor economic developments. The ECB has reiterated its commitment to a meeting-by-meeting, data-dependent approach, stating, "The Governing Council is not pre-committing to a particular rate path."

The ECB's recent actions and future path have drawn varied responses from economists. Carsten Brzeski, Global Head of Macro at ING Bank, suggested that the risk of inflation undershooting its target is increasing, providing the ECB with "ample room to bring interest rates into neutral territory" and predicting that the recent cut "will not be the last." Conversely, Joerg Kraemer, Chief Economist of Commerzbank, has cautioned against further lowering policy rates, citing concerns about dominant long-run inflation risks.