The ECB cuts rates again but signals a pause in cuts
The banking institution lowers the price of money for the seventh consecutive time and sets it at 2%.
BrusselsInflation appears to be under control and the eurozone continues to record almost anemic economic growthIn this context, despite Donald Trump's new tariff threats, the European Central Bank (ECB) decided this Thursday to lower interest rates for the seventh consecutive time and the eighth in a year, as planned. Thus, the banking institution chaired by Christine Lagarde has reduced its interest rates by 0.25 percentage points by a large majority, bringing the price of money to 2%.
However, Lagarde hinted at the press conference that the ECB is likely to pause its cuts in the price of money. In this regard, the French leader assured that rates are now "in a good position to face the uncertainties that will come in the coming months." "We have almost concluded a monetary policy cycle that sought to address a series of shocks," added the president of the banking institution, referring to the pandemic, the war in Ukraine, and the energy and price crises.
Increasing or decreasing interest rates is the ECB's main tool for trying to curb inflation, and so, in the face of the price crisis in the eurozone, the bank decided to raise them abruptly. However, the rate of price increases has gradually decreased, reaching around the ECB's target of 2%.
In fact, the ECB's own economic forecasts, published this Thursday, estimate that the eurozone will reach this target this year and remain at just 2% inflation, three-tenths of a percentage point lower than the banking institution had initially forecast. As Lagarde explained in a press conference, this downward revision is due to "an appreciation of the euro" and "lower" energy prices than expected. By 2026, the inflation rate is expected to rise to 1.6%, and in 2027, it would see a slight rebound, reaching 2% again. In contrast, core inflation—which does not take into account more volatile products, such as fresh food or energy products—will remain slightly higher. This year it will be 2.4%, and 1.9% in 2026 and 2027.
On the other hand, gross domestic product (GDP) growth in the countries of the single currency will remain around one percentage point. According to ECB projections, it will be 0.9% this year, 1.1% next year, and 1.3% in 2027. In this regard, Lagarde stated that the first quarter of 2025 has been more "vigorous" than expected, particularly due to the increase in public investment in defense and rearmament. However, at the end of the year, growth prospects are "weaker" due to the "global disturbances" caused by Trump and Vladimir Putin's regime, although she believes this factor can be offset by "an increase in real incomes and a solid labor market." "This should strengthen the resilience of the eurozone economy," the ECB president added.
In any case, Lagarde noted that these projections are subject to the trade war launched by the White House and asserted that they depend primarily on how the conflict with the EU ends. "If there is an escalation of trade tensions, growth and inflation would be lower than expected. On the other hand, if the tensions are resolved with a favorable outcome, growth and, to a lesser extent, inflation would be higher than expected," the French leader said. Be that as it may, the ECB's path of interest rate reduction has not been interrupted by the uncertainty caused by the tariff war initiated by the Donald Trump administration.
It's worth remembering that Trump doubled import taxes on steel and aluminum products this week, increasing them from 25% to 50%. He also threatened the European Union with raising customs duties on all products to 50%. Although he initially promised they would take effect on June 1, a few days later he postponed the move to July 9. However, US and EU authorities continue negotiating to find an agreed-upon solution to the trade war initiated by the White House.
However, this uncertainty, coupled with the fact that inflation appears to be stabilizing around the 2% target, suggests that the ECB will at least pause its drive to reduce the price of money. In this regard, apart from Lagarde's words, several analysts and financial sector experts predict that interest rates will remain at 2% at the next meeting of the ECB's governing council on July 24, as the truce in the trade war between the European Union and the United States will have ended just a few days ago.