ECB Cuts Rates as Inflation Nears Target (03.07.2025)

The Governing Council has decided to cut the three main ECB interest rates by 25 basis points.

The reduction in the deposit facility rate, which has a key role in shaping monetary policy, is based on a reassessment of inflation expectations, underlying inflation trends, and the effectiveness of monetary policy transmission.

Inflation Outlook and Projections

The disinflation process is progressing as expected, with inflation evolving in line with previous projections. The latest forecasts indicate:

Headline inflation is expected to average 2.3% in 2025, 1.9% in 2026, and 2.0% in 2027.
The upward revision for 2025 is mainly due to stronger energy price dynamics.
Core inflation (excluding energy and food) is projected to average 2.2% in 2025, 2.0% in 2026, and 1.9% in 2027.

Most indicators suggest that inflation will stabilize around the ECB’s 2% medium-term target. However, domestic inflation remains elevated, as wages and prices in some sectors are still adjusting to past inflation surges. Wage growth is slowing as expected, and profits are helping to cushion inflationary pressures.

Monetary Policy and Economic Impact

With the interest rate cuts, monetary policy is becoming less restrictive, making borrowing more affordable for businesses and households and boosting loan growth. However, the full impact of previous rate hikes continues to weigh on credit demand, keeping lending subdued. The economy remains under pressure, leading to another downward revision of growth projections. The ECB now expects GDP growth of 0.9% in 2025, 1.2% in 2026, and 1.3% in 2027. Slower export growth and weak investment, partly due to ongoing trade policy uncertainties, are the primary reasons for the downgrade. Despite these challenges, rising real incomes and the gradual fading of past rate hike effects are expected to support demand in the future.

Future Policy Approach

The Governing Council remains committed to ensuring that inflation stabilizes sustainably at the 2% target. Given the rising economic tensions, it will take a data-driven, meeting-by-meeting approach in determining future monetary policy decisions. The ECB has emphasized that it is not committing to a fixed rate path, maintaining flexibility to adapt to changing economic conditions.

Source: ECB

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