As widely expected, the ECB announced last week a 25 basis point cut in its key interest rates, marking the sixth rate reduction in nine months, leaving the deposit facility rate at 2.5%, now classified as “significantly less restrictive.” The decision to cut the key rate was supported by projections showing inflation converging toward the 2% target, as well as by considerations of the economic challenges the region has been facing. The rate cut was approved by consensus within the ECB Governing Council. However, Christine Lagarde noted that Austrian central bank governor Robert Holzmann abstained from the vote, indicating that recent developments in Europe introduce uncertainty regarding the need for the ECB to continue its restrictive cycle.
The ECB’s new economic projections revealed: 1) a further downward revision of the region’s economic outlook for 2025 and 2026, and 2) an upward revision of inflation forecasts for this year, reflecting “stronger dynamics in energy prices.” Core inflation projections were largely unchanged, indicating that inflation is expected to reach 2% at the beginning of 2026, later than previously anticipated.
However, it is worth noting that the new projections do not yet take into account Germany’s more flexible stance on public investment: with expected investment of EUR 500 billion in key areas over 10 years, and the exemption of defense and security spending from the country’s fiscal limits. On this topic, Lagarde commented that she expects the announced package to “boost the European economy” and result in inflationary pressures, while noting that more details and concrete data would be needed to assess the outcome of these policies.
Overall, these new projections should be interpreted with caution. The level of uncertainty stemming from fiscal policy, ongoing geopolitical risks, and the possibility of a trade war — including tariffs imposed by the Trump administration — are all factors that could significantly impact the projections. Lagarde also emphasized this point during the post-meeting press conference: “The current outlook is shrouded in uncertainties and, more than ever, will require us to remain vigilant… we will need to be agile in responding to incoming data.” Additionally, she highlighted that ECB decisions will need to be, “more than ever,” data-dependent.
Regarding the next steps, there is still limited visibility on what the ECB will do, but Lagarde left the door open for a pause in the rate-cutting cycle if economic data prove unfavorable. This statement aligns with the shift in language concerning the restrictiveness of key rates, indicating that they are approaching neutral levels.
In summary, this meeting took place without surprises, amid a highly uncertain economic environment. However, the ECB indicated that decisions on further rate cuts will not be as straightforward as in this meeting. Investors appear to believe that a pause in the rate-cutting cycle is approaching, as only two rate cuts are fully priced in for this year, with six meetings remaining on the central bank’s calendar.
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