5 June 2025
If you are covering the latest ECB interest rate decision, please see the following comment from Lindsay James, investment strategist at Quilter:
“As had been all but guaranteed, the European Central Bank has confirmed its eighth rate cut since June 2024, taking interest rates to 2%.
“Inflation, or rather disinflation, will undoubtedly have been a deciding factor in today’s rate cut. Back in March, the ECB had expected headline inflation to come in at 2.3% in 2025 and fall to 1.9% in 2026. Instead, we are now seeing these targets being hit a year earlier than predicted. At the same time, the disinflationary impact of the recent tariff saga increased the risk of inflation undershooting, paving the way for today’s cut.
“Headline Eurozone CPI came in at 1.9% in May, down from 2.2% in April and even lower than the market expectation of 2%. Core inflation also plummeted, dropping to 2.3% from 2.7% prior. Much of this was owed to falling energy prices – down 10% since the ECB’s last monetary policy meeting - and a sharp decline in service price inflation, which was largely due to slowing wage growth. Wage inflation has been a persistent problem for the ECB since the pandemic, but we are now seeing this pressure fading as companies hold off on expansion plans amid the current global uncertainty.
“Other pressures still exist, however, and the ECB previously estimated that if the EU were to put in place its planned package of tariffs retaliating against Washington, inflation in the eurozone could be 0.5 percentage points higher than would otherwise be the case. While the central bank seems to have u-turned on this in today's release with claims further trade tensions would see growth and inflation come in below baseline projections, as there is yet to be a trade agreement with the US, it comes as little surprise that the ECB has maintained its data dependent approach for now.
“Given the economic landscape it still needs to traverse, the central bank is biding its time and has made no promises as far as its next steps are concerned. Nonetheless, growth is still vulnerable to downgrades, and with inflation weakening, providing retaliatory tariffs are avoided, it seems likely we will see the ECB make further cuts in the not too distant future.”
