The European Central Bank lowered its benchmark interest rate by 25 basis points on Thursday, marking the eighth consecutive cut and bringing the key deposit rate down to 2%, the lowest level in over two years.
Effective June 11, 2025, the rates on the ECB’s main refinancing operations and marginal lending facility will also drop to 2.15% and 2.40%, respectively. These rates represent the cost for banks borrowing from the ECB for one week and overnight, while the deposit facility is the interest paid to banks depositing funds overnight.
“While the uncertainty surrounding trade policies is expected to weigh on business investment and exports, especially in the short term, rising government investment in defence and infrastructure will increasingly support growth over the medium term,” said the ECB on Thursday. The central bank added, “Higher real incomes and a robust labour market will allow households to spend more. Together with more favourable financing conditions, this should make the economy more resilient to global shocks.”
Thursday’s reduction cuts the deposit rate to half its peak level from June 2024 and is supported by easing inflation pressures. Eurozone annual inflation in May fell below expectations to 1.9%, down from 2.2% in April and below the ECB’s 2% target. Core inflation, excluding volatile food and energy costs, also eased to 2.4% from 2.7%.
This faster-than-expected cooling is partly attributed to a stronger euro, which makes imports cheaper, and lower energy prices. A softer labour market is also expected to help keep inflation in check in the near term. Additionally, goods diverted from the US due to high tariffs may increase supply in Europe, potentially reducing costs further.
The eurozone economy grew by 0.3% in Q1 2025, surpassing forecasts and improving on the previous quarter’s 0.2%. Despite global trade tensions disrupting demand, increased government spending on defence and infrastructure in Europe has raised optimism for growth.
Notably, Germany has amended its ‘debt brake’ to exempt defence spending above 1% of GDP from borrowing limits and established a €500 billion fund for additional infrastructure investments.
Given these factors, Thursday’s rate cut may be the ECB’s last for a while. A recent ING note stated, “the market has priced in one cut by the end of the year to a deposit facility rate of 1.75%,” but also noted, “There are moderate chances that the ECB could cut further later on. Pricing, however, is mostly driven by sentiment surrounding US-EU trade relations, with tensions having risen again of late.”
