Most monetary policy observers agree that the European Central Bank is nearing the end of the rate reduction cycle, but the market is split on whether one or two cuts will continue this year, and how soon they will come. rear ECB’s decision to lower interest rates on June 5th At 0.25% points, there are four scheduled monetary policy meetings remaining in 2025.
The cuts in June were the eighth since the easing cycle began a year ago. In total, the ECB has halved its key deposit rate from 4% to 2% in more than a year, marking one of the fastest transitions from tightening to easing for key central banks in both pace and size.
ECB’s three main interest rates
•Deposit facility fee: 2.00% (as of June 11th)
•Main refinance rate: 2.15%
• Limited lending facility: 2.40%
and Eurozone inflation returns near the 2% target And borrowing costs have been eased, and many analysts believe the ECB could be close to its termination rate. This is at a level where monetary policy does not stimulate or limit the economy.
However, geopolitical instability and unpredictable US trade policy complicate the outlook.
As of late June, the swap market reflects expectations of approximately one ECB rate reduction by the end of the year, with September being considered the most likely window. The July move appears increasingly unlikely as investors expect the ECB to wait for more clarity in US trade policy under the forecasts of President Donald Trump and the next ECB staff in September.
Current pricing means there is a slight chance that it will be cut in July, but it is priced at around 0.14% points in September. By December, the implicit deposit rate will be around 1.70%, indicating that the market is expecting a full cut, but more than that.
Does the ECB reduce the rate to a neutral level?
Michael Field, the leading strategist in Morningstar’s European market, believes that the ECB may already be approaching the final destination of this rate-cut cycle. He points out that inflation is projected to rise by 2% in June. It is also relatively stable at or around the central bank’s target level.
“This shows that the bank has found equilibrium levels of interest rates. We’ll admit there may be some tinkering around the edges, but we don’t expect any major cuts or hikes unless the economic situation changes significantly in the second half.”
Field adds that over the past two years, the charts of interest rates across major central banks have revealed a harsh contradiction. “The UK and US fees are still 4% north, but in the EU it’s half that level. I don’t think we’ve fully appreciated how fast and stiff the ECB is last year.”
Fidelity’s capital market strategist Carsten Roemheld sees room for operation. “We expect the ECB to cut its fees one or two more times by the end of the year, reducing its deposit rate to 1.5%,” he says. “Supposedly, given the still weak economic environment and current expectations of inflation, such a strategy appears to be justified for now.”
“However, this will make the deposit rate lower than the so-called “neutral” rate, which is still assumed to be around 2%. This implies a more expanding policy stance, in contrast to the US, which expects a more restrictive approach with stable key interest rates by the end of the year. ”
The most likely cut in September, but not certain.
Bastian Freitag, German bond head at Rothschild & Co Wealth Management, believes that one more fee will cut the most likely scenario, but it remains uncertain whether this will occur in July or September.
“We believe that following the release of the new forecast, we could potentially cut another 25 basis points in September. But it depends heavily on how tariffs, growth and inflation evolve,” he told Morningstar.
He points out that recent ECB communications, including comments from Executive Committee member Isabelle Schnabel, suggest that the ECB could pause in July and wait for an updated macro projection.
In his speech on June 24th, ECB Chief Economist Philip Lane emphasized The need for flexibility and attention. He said the bank’s challenge of bringing inflation back to targeting is largely being achieved, but that its new geopolitical and trade-related uncertainties call for a cautious, data-dependent, flexible monetary policy. “As a result, it is impossible to accurately pilot future rate passes,” Lane said.
ECB President Christine Lagarde echoed That stance on June 23 highlighted that the ECB would set interest rate policies per meeting without prior commitment to a particular pass. Future decisions will be guided by inflation outlook, underlying price dynamics and the strength of monetary policy transmission, she said.
ECB staff is forecast for June 2025
inflation:
•2.0% in 2025 (2.3% in March)
•1.6% (1.9%) in 2026
•2.0% for 2027 (unchanged)
Growth (GDP):
•0.9% for 2025 (unchanged)
•1.1% (1.2%) in 2026
•1.3% for 2027 (unchanged)
Iran-Israel conflict and trade war bring uncertainty to inflation
Inflation is close to the target, but recent geopolitical shocks have added volatility to the outlook. The Middle East conflict appears to be suspended for now, with Brent oil prices rising about 20% back to early June levels, easing inflationary pressures.
According to Deutsche Bank Research, the US$10 per barrel rise in oil prices will increase approximately 0.25 percentage points to the Harmony Index of Advanced Consumer Prices (HICP) (HICP), 0.4 percentage points in 12 months, within two to three months. The ECB’s June forecasts take into account a $10 drop in oil prices and could challenge the expected delamination route.
Rising energy prices represent a negative supply shock, thus reducing growth. With every USD 10 per barrel, the eurozone oil import bill rises around 40 billion euros, equivalent to a 0.25% GDP loss.
How will interest rate reductions affect investors?
The stock market is likely to increase with expected interest rate cuts. In the bond market, a fall in interest rates means lower yields, leading to higher bond prices. Also, lower fees are existing bonds, especially bonds already issued during the period of higher rates, making them attractive due to their yields.
On the other hand, the cash savings rate in a bank account is likely to undermine the savers. The fees received by a Savers are primarily dependent on the deposit facility. This defines the interest that a bank receives to deposit money with the ECB overnight. In contrast, borrowers benefit from lower fees as consumer debt and mortgages get cheaper.
When will the remaining ECB meetings of 2025 be?
•July 24, 2025
•September 11, 2025
•October 30, 2025
•December 18, 2025
