ECB cuts interest rates for eighth time in just over a year

The European Central Bank (ECB) has reduced its three key interest rates by 25 basis points, marking the eighth cut in just over a year. The new rates, effective today, lower the deposit facility to 2.00%, the main refinancing operations rate to 2.15%, and the marginal lending facility to 2.40%.

The move, announced by the ECB’s Governing Council on June 5, reflects growing confidence that inflation is stabilising around the central bank’s medium-term target. In its statement, the ECB said the decision, particularly the cut to the deposit rate, its main tool for steering monetary policy, was based on updated projections showing a sustained moderation in inflation, improving underlying price pressures, and continued strength in monetary policy transmission.

Inflation is now hovering near the ECB’s 2% target, with the latest Eurosystem staff projections forecasting headline inflation to average 2.0% in 2025, 1.6% in 2026, and return to 2.0% in 2027. These projections are 0.3 percentage points lower for both 2025 and 2026 than previously expected, largely due to falling energy prices and a stronger euro. Core inflation, which excludes energy and food, is projected to remain steady, averaging 2.4% in 2025 and 1.9% in the two years that follow.

The interest rate reduction comes amid modest but steady economic growth across the euro area. Real GDP is expected to grow by 0.9% in 2025, 1.1% in 2026, and 1.3% in 2027. A stronger-than-expected first quarter of 2025 has offset weaker prospects for the rest of the year. While global trade uncertainty remains a drag on investment and exports, rising government spending, particularly in infrastructure and defence, along with resilient household consumption and favourable financing conditions, are expected to support growth over the medium term.

Despite ongoing geopolitical uncertainty and recent trade tensions, the ECB noted that concerns about tightening financing conditions have eased. Most measures of underlying inflation suggest price pressures are moderating sustainably. Although wage growth remains elevated, it is visibly slowing, and company profits are absorbing some of the impact, helping to contain inflation.

The ECB reaffirmed its commitment to a data-dependent approach, stating that future rate decisions will be made on a meeting-by-meeting basis, guided by evolving economic and financial conditions. It also emphasised that it is not pre-committing to any particular path for interest rates.

“The Governing Council is determined to ensure that inflation stabilises sustainably at its 2% medium-term target,” the statement read. “Especially in the current conditions of exceptional uncertainty, our monetary policy stance will be guided by incoming data, underlying inflation dynamics, and the strength of monetary policy transmission.”

With today’s cut, the ECB continues its gradual shift toward a more accommodative monetary stance, aiming to balance inflation control with economic support as the eurozone recovers from recent global shocks.