The European Central Bank stands poised to cut its key interest rate by 25 basis points Thursday, with markets pricing in a 99% probability for the reduction according to LSEG data. The move would lower the deposit facility rate to 2%, representing half of the mid-2023 peak of 4% that marked the ECB's aggressive monetary tightening cycle.
What to Know:
- ECB expected to cut deposit rate from current level to 2% on Thursday
- Euro zone inflation fell to 1.9% in May, below the central bank's 2% target
- Economic growth remains sluggish at 0.3% in first quarter of 2025
Economic Conditions Drive Policy Shift
The anticipated rate reduction comes as inflation data shows consumer prices in the euro zone rose just 1.9% in May, hovering near the central bank's 2% target. Economic growth has remained tepid across the bloc. The gross domestic product in the euro zone expanded by only 0.3% in the first quarter of 2025, according to the latest official estimates.
Europe confronts multiple uncertainties that complicate the central bank's policy outlook. President Donald Trump's tariff agenda poses potential negative impacts on growth, while possible retaliatory measures from the European Union add another layer of complexity. The EU's major rearmament plans and Germany's significant fiscal policy changes introduce additional variables into the economic equation.
Tuesday's inflation figures have increased speculation that the ECB might implement another rate cut as early as July, according to Jack Allen-Reynolds, deputy chief euro zone economist. The combination of subdued price pressures and weak growth creates conditions that typically favor monetary easing.
Analyst Expectations Point To Gradual Approach
Financial analysts widely anticipate additional interest rate cuts from the ECB throughout the remainder of the year, though they don't expect explicit forward guidance from the central bank. The institution has maintained a meeting-by-meeting approach to preserve flexibility in its policy decisions.
Barclays economists suggested in a recent note that while rate cuts remain on the horizon, implementation may proceed more cautiously than some market participants expect. "We believe the ECB will remain non-committal on its policy path and continue to follow a meeting-by-meeting approach to maintain flexibility and optionality in policy calibration," they stated.
The investment bank forecasts two additional 25-basis-point reductions in September and December. This timeline would mean the ECB holds rates steady during the summer months before resuming cuts in the fall.
BofA Global Research published analysis earlier this week indicating the ECB was "running out of reasons not to go below 2%." The report echoed expectations for further rate reductions while noting the central bank's reluctance to provide explicit guidance about future moves.
"We expect some acknowledgment that door is open to move rates below 2%, but a very explicit signal is unlikely," the BofA report stated. "Uncertainty on tariffs will give the Governing Council enough cover to not pre-commit to more."
Staff Projections To Provide Economic Clarity
The ECB will release its latest staff projections this week, offering insights into the central bank's expectations for inflation and economic growth. These forecasts come after the Organisation for Economic Co-operation and Development published its latest Economic Outlook report, which projected 1% growth and 2.2% inflation for the euro area this year.
The staff projections typically influence market expectations about the central bank's future policy direction. Economists and investors scrutinize these forecasts for clues about how aggressively the ECB might pursue rate cuts in coming months.
Consumer Impact Varies By Financial Product
Rate cuts from the ECB would primarily affect consumer borrowing and savings rates, though the impact varies significantly depending on the specific financial products involved. Bas van Geffen, senior macro strategist at RaboResearch, explained that the duration and structure of rate commitments determine how quickly changes transmit to consumers.
Short-term deposit rates typically follow the ECB's deposit rate closely. "The interest rate on short-term deposits tends to follow the deposit rate quite closely," van Geffen told CNBC. A week after the ECB meeting, the policy rate goes into effect.
"If the ECB cuts the deposit rate Thursday, banks will receive 0.25% lower interest on their deposits with the central bank," van Geffen explained. "This may cause them to lower the interest rate they pay on savings accounts as well."
Products with fixed longer-term rates maintain a more complex relationship with central bank interest rates. These rates reflect both current policy settings and future expectations rather than simply tracking the ECB's immediate decisions.
"The market has long been expecting the ECB to cut rates this week," van Geffen noted. "So, that may already be included in long-term interest rates to some extent. That also means that these long-term rates do not necessarily change after this week's policy decision."
Economic Uncertainty Shapes Future Outlook
The European economy faces a challenging environment that extends beyond traditional monetary policy considerations. Geopolitical tensions, trade policy uncertainty, and fiscal policy shifts across member states create a complex backdrop for central bank decision-making.
Germany's fiscal policy changes represent a significant development for the euro zone's largest economy. The country's approach to government spending and taxation could influence broader economic conditions across the monetary union.
Closing Thoughts
The ECB's widely anticipated rate cut Thursday reflects the confluence of cooling inflation and persistent economic weakness across the euro zone. While markets expect additional easing measures, the central bank's cautious approach to forward guidance leaves considerable uncertainty about the pace and extent of future rate reductions.