ECB Cuts Rates by 25bps, Signals Pause Amid Uncertainty in Global Trade and Inflation Outlook

The European Central Bank (ECB) cut interest rates by 25 basis points on Thursday, marking its eighth rate reduction since June 2024. The move, widely expected by markets, lowers the deposit facility rate to 2.00%, the main refinancing operations rate to 2.15%, and the marginal lending facility rate to 2.40%, effective June 11. While the rate cut was fully priced in, the focus quickly shifted to ECB President Christine Lagarde’s press conference, where she suggested the ECB is now in a “good place,” signaling a likely pause in further easing—at least in the near term.

Lagarde said the decision was “almost unanimous,” with only one dissenter, and emphasized that the Governing Council remains committed to ensuring inflation stabilizes at its 2% medium-term target. She noted that the eurozone economy is navigating a period of “significant uncertainty,” especially in light of escalating trade tensions and political developments globally. Her tone suggested caution, with forward policy decisions to be taken on a “meeting-by-meeting” basis and firmly guided by incoming data.

The ECB’s decision comes as inflation continues to retreat toward target. Headline consumer price inflation fell below the 2% threshold last month for the first time since September 2021, with the latest ECB staff projections showing inflation averaging 2.0% in 2025, 1.6% in 2026, and 2.0% again in 2027. These figures are down 0.3 percentage points from March projections, largely due to lower energy price assumptions and a stronger euro. Core inflation (excluding food and energy) is projected to remain slightly above target at 2.4% in 2025 before easing to 1.9% by 2026.

On growth, the ECB expects real GDP to expand by 0.9% in 2025, 1.1% in 2026, and 1.3% in 2027. While the first quarter of 2025 showed surprising strength, the ECB’s baseline incorporates weaker activity for the remainder of the year, reflecting downside risks from global trade disruptions, rising tariffs, and geopolitical tensions. Lagarde highlighted that higher tariffs and a stronger euro could impair export competitiveness and investment, particularly as global trade becomes more fragmented. However, she added that increasing public investment in defense and infrastructure may offer some medium-term support.

Lagarde also noted that while labor markets remain resilient, wage pressures are gradually moderating, and firms are absorbing some cost increases through margins rather than passing them on to consumers. “Most measures of underlying inflation suggest that inflation will settle at around our 2% target,” she said. She also pointed to the easing of financial conditions and firming consumption, helped by rising real incomes, as factors that should cushion downside risks to growth.

Bond markets welcomed the decision. Yields on 10-year government bonds in Germany, France, Italy, and Spain fell 3–5 basis points following the announcement, reflecting investor confidence that the ECB is now in a more accommodative stance. However, the euro traded slightly firmer on the day, reflecting market relief that the ECB is unlikely to embark on a more aggressive rate-cutting cycle unless data materially deteriorate.

Looking ahead, Lagarde emphasized that the ECB is not pre-committing to a rate path. “We have not discussed the neutral rate,” she said, and added that the current stance “is appropriate for the information we have today.” She acknowledged that significant uncertainty remains, especially surrounding U.S. trade policy. In particular, she cautioned that “an escalation in global trade tensions could lower euro area growth by dampening exports and dragging down investment and consumption.” The ECB’s staff also published scenario analyses modeling the effects of worsening trade tensions versus a benign resolution, with the former pointing to growth and inflation falling below the baseline.

Investors will now watch for confirmation of a pause at upcoming meetings. Market participants expect the ECB to stay on hold through the summer unless inflation or growth surprises significantly to the downside. Lagarde’s suggestion that rates are now “in a good position” underscores the ECB’s intention to evaluate the effects of previous cuts and wait for clarity on both external shocks and the evolution of domestic inflation dynamics.

In sum, while Thursday’s rate cut was expected, the message that the ECB is content with current policy and ready to pause marks a turning point in its easing cycle. With inflation near target, growth modest, and geopolitical risks looming large, the ECB appears to be shifting from acceleration to caution. For investors, the ECB’s wait-and-see stance, combined with a fragile macro environment, will keep monetary policy in the spotlight throughout the second half of the year.