ECB cuts borrowing costs by 25 basis points, deposit rate falls to 2 per cent

One more cut. The European Central Bank reduced the official cost of credit by 0.25 percentage points. The deposit rate thus drops to 2%, the main refinancing rate to 2.15%, and the marginal lending rate to 2.40%. The decision was taken with one dissent. Above all, the ECB published new quarterly macroeconomic projections that signal that the phase of countering high inflation may have come to an end. "Most measures of core inflation indicate that inflation will settle, on a sustained basis, around the 2 per cent target in the medium term," explains the statement published immediately after the decision: exactly what the Frankfurt institution had set itself.

"We are coming to the end of a monetary policy cycle," President Christine Lagarde explained, referring to the long phase marked by the Covid shocks, the war in Ukraine and the rise in energy prices: now the ECB "expects inflation to return to target in 2027", the monetary policy time horizon, after a fall below target (which partly justifies the June cut and could also suggest further cuts should the speed of prices fall across the board). Macroeconomic projections show that inflation may fall to 2.0 % per annum on average in 2025 (2.3 % in the March forecast), rise to 1.6 % in 2026 (1.9 % three months ago) and return to 2.0 % in 2027. "The downward revisions from the March projections of 0.3 percentage points for both 2025 and 2026 mainly reflect lower energy price assumptions and a stronger euro," the statement continued. . The core index will rise by an average of 2.4 % in 2025 (2.2 % in March) and 1.9 % in 2026 and 2027 (2.0 % and 1.9 %, respectively).

There was little change in the forecast for economic activity. The ECB staff points to average real GDP growth of 0.9 % in 2025 (unchanged from March), 1.1 % in 2026 (from 1.2 %) and 1.3 % in 2027 (unchanged from previous projections). "The unchanged growth projection for 2025," the statement continued, "reflects a stronger-than-expected first quarter - the 0.3 % estimated by Eurostat could also be revised upwards, Lagarde explained - combined with weaker prospects for the rest of the year.

The crux remains tariffs. "The uncertainty surrounding trade policies is expected to weigh on business investment and exports, especially in the short term," the ECB continues; although "increased public investment in defence and infrastructure will increasingly support growth in the medium term. Higher real incomes and a robust labour market will allow households to spend more. Together with more favourable financing conditions, this should make the economy more resilient to global shocks'.

However, the ECB elaborated different scenarios, depending on different developments in global trade policies. "A further escalation of trade tensions in the coming months would result in growth and inflation being lower than the baseline projections," it explained: in this case, growth could be 0.5% this year, 0.7% in 2026 and 1.1% in 2027 with inflation at 2%, 1.5% and 1.8% respectively, thus remaining below the target and possibly leaving room for further cuts. In contrast, "if trade tensions were to be resolved with a benign outcome, growth and, to a lesser extent, inflation would be above the baseline projections". GDP would rise by 1.2 per cent this year, 1.5 per cent next year and 1.4 per cent in 2027 with inflation at 2.0 per cent, 1.7 per cent and 2.1 per cent, respectively. For the ECB, the trade tariffs imposed by the United States constitute - as Lagarde has repeatedly explained - a demand shock that therefore manifests its impact on economic activity and inflation in the same sense.