The European Central Bank is widely expected to cut its deposit rate by another 0.25 percentage points to 2% on June 5, marking the eighth interest rate cut in the easing cycle that could be nearing its end. The decision comes even within the eurozone’s economic outlook despite the continued uncertainty caused by President Donald Trump’s trade tariffs.
Morningstar’s chief European stock market strategist Michael Field says inflation in the eurozone is firmly curtailed.
“Unlike the US, the revival of inflation is a serious possibility, thanks to the threat of tariffs. In Europe, central banks feel it has a decent grip. Currently, inflation in the eurozone is 2.2% away from the bank’s 2% target, allowing the ECB to take another step in the direction of lower profits.”
Eurozone inflation is expected to fall below 2% in May Data released on June 3rd.
The current eurozone interest rates allow central banks to manage a lot, Field adds.
“From here, we have the ability to significantly lower or raise fees when dealing with changes in the economic situation. There are things that can’t be done if the rate is zero or actually at 4%.”
What are the main ECB interest rates?
As of April 23, the three main ECB interest rates are as follows:
Deposit facility fee: 2.25%
Main refinance rate: 2.40%
Limited lending facility: 2.64%
Has the ECB rate cut cycle finished?
The market is increasingly seeing cuts in June as the penultimate move of the current easing cycle. The swap market is almost fully priced, with a 0.25 percentage points cut on June 5th, but expectations for the third cut in September are just above 50%. Overnight index swap means there is a low probability of a reduction on July 24th, the next meeting after June.
Ulrike Kastens, senior economist at DWS, expects the ECB to cut by 0.25 percentage points again in June and July.
“There’s one more room for cuts since June, but the air will fade from here as inflation mitigation and growth rates stabilize,” she says.
“Money policy is clearly not a limit anymore. Lending is on the rise. Perhaps not for businesses, but in the real estate sector, growth is decent. This indicates that interest rates are no longer a hindrance.”
In contrast to current market expectations, analysts at German bank Herabha have confirmed that after the cuts in June, the easing cycle will likely reach a temporary halt, leading to a longer monetary policy retention phase.
“In the second half of the year, the ECB could move into standby mode. The market is priced at a different rate cut (July), but the shift to a more vast fiscal policy announced is against further financial easing,” bank analysts say.
There is also a growing division within the ECB governing council. Robert Holtzmann, governor of Austria’s central bank, claims it remains stable until at least September. He claims that the policy rate has already reached neutral levels, between 2.5% and 3%. Board member Isabel Schnabel warns that early cuts could blow inflation amid trade tensions.
In contrast, Bank of France Governor François Villeroy des Garhau said in a speech on May 27 that normalisation of policy was “not perfect,” emphasizing weak business activities and lower inflation justification for ongoing accommodation.
What does trade tensions with the US mean for the eurozone economy?
Although US President Donald Trump is currently behind until July 9th as tariffs on 50% of EU goods, trade policy is a major source of macroeconomic uncertainty.
However, in the first quarter of 2025, Eurozone GDP slightly surpassed its 0.2% forecast, up 0.3% quarterly. Germany, the bloc’s largest economy, was also surprised by Germany, which expanded by 0.4% and 0.4% compared to the consensus forecast of 0.2%. Economists at the Belenberg Project, driven primarily by the turnaround in Germany’s fiscal policy, have managed to capture eurozone growth modestly from 0.8% in 2024 to 1% this year, 1.4% in 2026 and 1.5% in 2027.
ECB may modify GDP and inflation forecasts
Central bank economists could revise their GDP forecasts upwards in their quarterly forecast on June 5, as the eurozone economy shows more resilience than the ECB previously predicted. In the final forecast in March, ECB staff predicted growth in eurozone GDP at 0.9% in 2025, with 1.2% and 1.2% from 1.1% in December, and 1.2% at 1.2%.
Ulrike Kastens of DWS states that these estimates are too conservative. “The growth outlook for the eurozone has improved thanks to fiscal stimulus and signs of normalization in the manufacturing cycle. Plus, many companies were building inventory.
The rise is reflected in the eurozone manufacturing PMI, which rose from 49.0 in April to a 33-month high of 49.4 in May, but still rose below the line separating contractions from expansion.
After strong Q1 data, DWS expects GDP growth of 1.1% in the eurozone in 2025, up from its previous forecast for 2026 and 1.4%.
Kastens also hopes ECB economists will revise their inflation forecasts from their first quarter forecasts.
Preliminary French data showed that May was far below expectations, slowing inflation to 0.6% year-on-year. Factset consensus forecast shows headline inflation rates falling to 1.9% in Mayand core inflation also drops to 2.3%.
Can the euro be removed as the world currency?
With growing concerns about US fiscal policy and geopolitical unpredictability, global investors are increasingly sought alternatives to the US dollar. The dollar remains the best global currency, accounting for around 58% of the Forex reserve, but that figure is declining, indicating a potential change in the international financial system. The Euro holds its second position at around 20%.
ECB President Christine Lagarde calls this a potential “global euro moment.”
in speech On May 26, she said the shifting global landscape provides an opportunity for the Euro to strengthen its international role. This is a move that will help reduce borrowing costs and make the eurozone more economically resilient. “The euro doesn’t get influence by default, you need to get it,” she said.
Lagarde handed out three pillars to enhance the euro’s international role. It is a stable legal framework supported by more powerful security cooperation, economic strength supported by deeper and more liquid capital markets.
“We must strengthen our legal foundations by defending the rule of law and by uniting politically to resist external pressure,” she said.
How will interest rate reductions affect investors?
The stock market is likely to increase with expected interest rate cuts. Morningstar Michael Field says that reducing the deposit rate to 2% will further increase the European stock market if business and consumer confidence is low.
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 next ECB meeting in 2025?
July 24, 2025
September 11, 2025
October 30, 2025
December 18, 2025
