LONDON (Reuters) -The European Central Bank cut interest rates for the eighth time in a year on Thursday, acknowledging inflation was under control and turning more pessimistic about economic prospects amid risks of a trade war with the United States.
The ECB’s key rate was lowered from 2.25% to 2.0%, the middle of the range that the central bank sees as “neutral” – neither curbing nor boosting the economy.
ECB President Christine Lagarde, at the post-meeting press conference, indicated the central bank was “in a good place” with monetary policy.
The euro got an additional boost from Lagarde saying there had been one dissenting vote in the decision to cut rates. It was last up 0.6% at $1.149 , while government bond yields rose.
Germany’s 2-year bond yield was last up 5 basis points at 1.846%, as traders cut the chances of more than one rate this year . The STOXX 600 index fell 0.15%.
COMMENTS:
MICHAEL PFISTER, CURRENCY STRATEGIST, COMMERZBANK
“The strength of the euro is coming from the ECB’s surprisingly hawkish message that they are approaching the end of the cutting cycle with today’s rate cut. Traders are no longer fully pricing in another rate cut this year. However, you also have to bear in mind that we are seeing dollar weakness at the same time, following rather weak U.S. data, which has reinforced concerns about the consequences of tariffs.”
KALLUM PICKERING, CHIEF ECONOMIST, PEEL HUNT:
“Policymakers have concluded that the net impact of the U.S.-driven shock to global trade will be disinflationary for the euro zone – this reveals an important detail about the ECB’s reaction function in the event that downside risks to growth begin to materialise. The ECB would feel safe easing more aggressively.
The near-total absence of any hint of upside risks to inflation suggests policymakers have grown in confidence that they will manage to achieve the 2% inflation target sustainably – which implies the ECB can bring rates at least to neutral, and perhaps below. But where is neutral? Perhaps that’s a question for Lagarde at the press conference.”
SIMON DANGOOR, HEAD OF FIXED INCOME MACRO STRATEGIES, GOLDMAN SACHS ASSET MANAGEMENT:
“In line with expectations, the ECB cut rates by 0.25% to bring the deposit rate to 2.0%. As trade uncertainty continues to pose risk to euro area economic growth and underlying disinflation is likely to remain persistent, we expect two more rate cuts, potentially bringing the rate down to 1.5% this year. We are keeping a close watch on fiscal developments and pension fund flows, which could open opportunities for Fixed Income investors.”
FRANCESCO PESOLE, FX STRATEGIST, ING:
“So far, a moderately dovish undertone, as inflation projections were revised lower by 0.3pp for both 2025 and 2026. This places the 2026 inflation forecast well below target at 1.6%. Partly offsetting the dovish signal is the lack of core inflation downward revisions. The euro would have probably weakened in other circumstances, but the lower-than-expected inflation data earlier this week had set the mood quite dovish.”
IRENE LAURO, EUROZONE ECONOMIST, SCHRODERS:
“While the ECB delivered a widely expected rate cut today, we would not count on a follow-up next month. Inflation was lower than expected in May, with services inflation falling sharply. Yet, with no signs trade tariffs are weakening growth, we expect the ECB is likely to pause from today. Labour markets remain tight, domestic demand is gaining traction, lending is picking up, and fiscal tailwinds are building.”
“With rates now at the midpoint of their estimated neutral range, the bar for further cuts has risen. Having already eased by 1.75% in this cycle, the ECB can afford to shift from urgency to patience.”
MARCHEL ALEXANDROVICH, ECONOMIST, SALTMARSH ECONOMICS:
“The ECB delivers another 25-bp cut, and nudges rates to the middle of its 1.5% to 2.5% neutral range. Alongside, the updated quarterly economic forecasts show a slightly weaker GDP growth profile and lower headline inflation in 2025 and 2026.”
“In light of these projections, the Governing Council should be in a position to cut rates again at the next meeting on 24 July. Although, of course, its response will partly depend on what happens after Trump’s 90-day tariffs pause comes to an end in early July.”
NATASHA MAY, GLOBAL MARKET ANALYST, J.P. MORGAN ASSET MANAGEMENT:
“Huge uncertainty about the future of global trade might make the ECB’s ever-more data dependent approach look prudent. Today, the Governing Council stuck to its usual script, with a 25-bps rate cut accompanied by little to no guidance about the future policy path. But in our view, this strategy pays too little attention to the downside risks to inflation.”
“Trade tensions look set to weigh more on euro zone activity – and therefore medium-term inflation – than they will directly boost prices. With inflationary pressures receding fast and growth headwinds picking up, the ECB is underestimating the risk of undershooting its target. While some Governing Council members are advocating for a July pause, the case for another rate cut is crystal-clear.”
HUSSAIN MEHDI, DIRECTOR, INVESTMENT STRATEGY, HSBC ASSET MANAGEMENT:
“The ECB looks to be in an enviable position. Underlying inflation is back at pre-Russia/Ukraine levels and disinflation looks set to continue amid a stronger euro and lower oil and gas prices. Tariffs may also help keep prices in check, given they weigh on demand, and could result in more Chinese goods being diverted from the U.S. to Europe.”
“Market pricing now shows a big gap between ECB and Fed rate cut expectations for 2025. Put simply, the Fed remains hamstrung by inflation amid the supply shock that is higher tariffs, and the impact of a weaker dollar. We think this keeps U.S. yields sticky, and the U.S. sto ack market volatile.”
“European assets, on the other hand, look to benefit from a proactive ECB, just as Germany is unleashing a once-in-a-generation shift in its fiscal policy stance that we believe is likely to boost structural growth. We think these “policy puts” can provide a powerful catalyst to unlock value in many European stock markets on a longer-term basis. German Bunds also look like an attractive option for multi-asset investors looking to protect their portfolios against downside risks, just as the safe-haven attributes of U.S. Treasuries are increasingly under question.”
DAVID ZAHN, HEAD OF EUROPEAN FIXED INCOME, FRANKLIN TEMPLETON:
“The ECB cut rates by 25 bps to 2%, as inflation eased to 1.9%, below target for the first time in over a year. Slowing price pressures and softer growth supported the move, though the policy stance remains cautious. A pause over summer is very likely as the ECB assesses trade risks and domestic resilience. Longer-term, fiscal rebalancing and external headwinds will shape the policy outlook to a more neutral policy stance.”
(Reporting by the Reuters Markets Team, Compiled by Dhara Ranasinghe; Editing by Amanda Cooper)
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