Eighth Rate Cut: ECB Slashes Key Rate to 2%
Central Bank lowers key interest rates down to 2%
The European Central Bank (ECB), responding to falling inflation rates and economic sluggishness in the eurozone, has lowered the key interest rate yet again. The ECB Governing Council, presided by President Christine Lagarde, decreased the key interest rate in the eurozone by 0.25 percentage points to 2.00%. This is the rate banks receive when they deposit excess funds with the central bank.
This marks the eighth interest rate reduction since the ECB moved to a loose monetary policy in mid-2024. According to Lagarde, the decision wasn't unanimous, with one council member abstaining from the vote. "The ECB Governing Council believes that the current interest rate level is appropriate for the current uncertainties," Lagarde asserted. The ECB refused to commit to a predetermined interest rate path, stating that it would reassess conditions in the future.
"The ECB is making the correct move," says Ulrich Reuter, President of the German Savings and Giro Association, regarding the ECB's decision. "In the midst of escalating geopolitical tensions and declining investment sentiment, the central bank is maintaining a steady course and delivering an important message of stability."
Yet, Heiner Herkenhoff, CEO of the German Banking Association, voiced concerns about further rate reductions. He claims there are "valid reasons" to forgo additional interest rate adjustments during the summer. "Further rate cuts by the ECB could exacerbate inflation again," says Herkenhoff. "Such actions, especially at this juncture, could be risky given the unknown impacts of trade disputes and tariffs."
Inflation Hits Target Amid Recession Fears
With inflation, which spiked due to the consequences of the Ukraine conflict, the central bank has now reached its target. Inflation in the eurozone was 1.9 percent in May, down from 2.2 percent in April. The ECB's target of 2.0 percent was even slightly undershot. Lagarde still regarded the inflation outlook as "exceptionally uncertain."
Meanwhile, the global trade war ignited by US President Donald Trump is weakening the economy in the eurozone. According to the EU Commission's May forecast, the eurozone's GDP will only grow by 0.9 percent this year. Previously, an increase of 1.3 percent was anticipated. One of the largest obstacles is the persistent weakness of the German economy, the largest economy within the 20-member bloc. The German Industry and Commerce Chamber expects the third consecutive year of recession.
Economy Struggling in OECD, Europe Waits for Recovery
Due to growth concerns and the unpredictable back-and-forth in the trade spat with the US, the ECB's outlook is marked by significant uncertainty. In such scenarios, businesses tend to delay larger investments. Potential sources of growth could be the planned European military buildup and the considerable financial package pushed in Germany.
ECB President Christine Lagarde also sees substantial risks to the economy from the disruption of the established world order as she stated in Berlin. "Instead of multilateral cooperation, we are witnessing zero-sum thinking and bilateral games," Lagarde criticized, without explicitly mentioning Trump. At the same time, new opportunities are emerging: "Given the current shifts, the time seems right for a greater international role for the euro."
While temporary economic weakness may restrain inflation, tariffs and disrupted supply chains could significantly boost inflation in the long run. The ECB has been adjusting its monetary policy on a case-by-case basis for some time. Some currency guardians have recently suggested pausing rate cuts in July. As of now, the probability of this is estimated at around 70% on the financial market.
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[Sources: 1] [2] [3] [4] VOX, European Central Bank, (June 5, 2025). [4] European Central Bank, Monetary Policy Decisions, (June 5, 2025).
The European Central Bank (ECB) has announced its decision to lower the interest rate policy, which banks receive when they deposit excess funds with the central bank, as part of their continued loose monetary policy. The employment policy implications of this decision could potentially impact businesses within the eurozone, as lower interest rates might lead to increased employment due to reduced borrowing costs for companies. Furthermore, the community policy within the eurozone, including the business environment, could be influenced by the ECB's finance decisions, particularly with regard to investments and trading activities, given the uncertain economic outlook and potential risks associated with geopolitical tensions and trade disputes.
