ECB cuts interest rates to 2% as inflation cools, growth stays slow

The European Central Bank trimmed interest rates by a quarter-point Thursday, lowering its benchmark deposit rate to 2% as inflation cools across the euro zone.

The cut, widely anticipated by markets, marks the ECB’s first reduction since September 2023, when rates peaked at 4%. Traders had priced in a near-99% chance of the move, according to LSEG data.

The decision reflects an improved inflation outlook, driven by a stronger euro and falling energy prices, the ECB said in a statement. Preliminary data this week showed euro zone inflation dipped to 1.9% in May, just below the bank’s 2% target.

“The Governing Council considers that the monetary policy stance remains supportive of inflation converging to target,” the ECB said.

The Stoxx 600 index held steady after the announcement, while the euro edged up 0.2% against the dollar.

Revised Inflation and Growth Forecasts

The ECB also lowered its inflation projections, now expecting prices to rise 2% in 2025, down from a March forecast of 2.3%. The 2026 outlook was similarly revised downward to 1.9%.

However, core inflation—which excludes volatile food and energy prices—was revised upward to 2.4% for 2025, signaling lingering price pressures in some sectors.

Growth remains sluggish, with the euro zone expanding just 0.3% in the first quarter of 2025. The ECB kept its full-year growth forecast at 0.9%, citing a stronger-than-expected start to the year offset by a weaker outlook ahead.

“Rising government investment in defense and infrastructure will support medium-term growth,” the bank said, though trade policy uncertainty may dampen business investment and exports.

Geopolitical Risks Loom

The rate cut comes amid rising global economic uncertainty, particularly over U.S. trade policies. Analysts warn that potential tariffs under former President Donald Trump could hit key European industries like steel and autos.

EU leaders have threatened retaliatory measures but have held off for now. Meanwhile, plans for increased defense spending across Europe add another layer of economic uncertainty.

The ECB did not signal further rate cuts but said future decisions will remain data-dependent. Policymakers emphasized that inflation risks remain “broadly balanced,” though energy market volatility and wage growth could still push prices higher.