The European Central Bank will meet on Thursday, June 5th, expected to cut interest rates by 25 basis points as it assesses the impacts of trade risks and disinflation.
An expected eighth cut in borrowing costs in a little over a year would see the ECB diverge further from the Federal Reserve, which has kept rates on hold in 2025. That divergence partly reflects the contrasting impact of higher US tariffs.
Rate Cuts Continue Amid Disinflation
The ECB has slashed rates seven times since it first began its rate-cutting cycle in 2024 as it assesses the Eurozone’s declining inflation. With inflation declining to 1.9% YoY, below the ECB’s 2% target, the central bank is expected to continue to reduce rates by 25 basis points, bringing the main financing rate down to 2.15%. ⁽¹⁾
This move follows a period of relative consensus within the Governing Council, but differing views are now surfacing. Some members, wary of potential spending surges by European governments, argue that 2.15% could be the floor of maintaining rates, while others argue that further cuts support fragile economic growth. ⁽²⁾
Growth and Inflation
The Eurozone’s economic outlook could be slowed down as fears of sluggish growth and longer-term inflation could raise concerns. The ECB is expected to downgrade its growth forecasts due to US tariffs, especially as President Trump is set to target the EU with new tariffs if negotiations don’t materialize during the 90-day pause.
Meanwhile, longer-term inflationary risks loom, including increased European defense and infrastructure spending and fractured supply chains. ⁽³⁾
Hawkish executive board member Isabel Schnabel has cautioned against additional easing, arguing that the ECB is in a good place to evaluate the likely future evolution of the economy and act as needed. ⁽⁴⁾
Tariff Risks and Rising Uncertainty
President Trump’s trade policies could complicate the ECB’s plans as the US aims to propose tariffs on European goods if an agreement is not met. Currently, most EU exports to the US face a 10% tariff but could rise to 50% by July, with additional duties on cars, steel, and aluminum already in place.
These tariffs could disrupt Eurozone inflation and growth. While energy costs have fallen and the Euro has strengthened since Liberation Day in April, retaliation from Brussels and shifts in US-China trade agreements could impact price trajectories unless they reach a deal. ⁽⁵⁾
Although it appears unlikely, an early deal between the European Union and the US that lowers tariffs on goods moving in both directions and takes a common approach to China would likely lift the outlook for growth and inflation. ⁽⁶⁾
Impact on the Euro
A stronger Euro versus the Dollar, combined with falling energy prices and potentially rising imports from China in the wake of the global trade war, could all “lead to lower inflation in the euro area,” said ECB Chief Economist Philip Lane. Despite the ECB’s rate cuts, the Euro has appreciated 10% against the US Dollar since February. ⁽⁷⁾
Lower rates, along with expectations of further easing ahead, are clearly having little impact on the Euro. Analysts expect the ECB to pause cutting rates in July to assess economic data and tariff impacts on the Eurozone. ⁽⁸⁾
ECB President Christine Lagarde is unlikely to give any meaningful guidance about the future rate path during her press conference, stressing that the region could face an extreme level of uncertainty and prefer not to commit to any path for future rate decisions. ⁽⁹⁾
Additionally, speculation about Lagarde’s future, fueled by rumors of her move to lead the World Economic Forum, has been dismissed by the ECB, with the central bank affirming Lagarde’s commitment to her current term until 2027.
