The European Central Bank (ECB) announced on June 5, 2025, a decision to lower its three key interest rates by 25 basis points, including a cut to the deposit facility rate.

This decision was motivated by a revised evaluation of the inflation outlook, underlying inflation dynamics, and the effectiveness of monetary policy transmission.

Current inflation is aligned with the ECB's target of approximately 2% in the medium term, registering at 1.9% in May, a decrease from 2.2% in April.

Projections indicate a future trajectory for headline inflation averaging 2.0% in 2025, followed by 1.6% in 2026, and returning to 2.0% in 2027. The downward adjustments from previous projections primarily stem from predicted lower energy prices and a strengthening euro.

The ECB’s updated economic outlook also forecasts real GDP growth at 0.9% for 2025, 1.1% for 2026, and 1.3% for 2027. This unchanged forecast for 2025 incorporates a robust performance in the first quarter but anticipates weaker growth in subsequent periods due to potential trade policy uncertainties affecting business investments and exports.

However, a rise in government spending on defense and infrastructure is expected to bolster future growth.

In its assessment, the ECB highlighted that while manufacturing appears to be recovering, the services sector demonstrates sluggishness.

The Council acknowledged that uncertainties surrounding trade policy could dampen both exports and domestic investment.

Nevertheless, a resilient labor market, increasing real incomes, and favorable financing conditions present a stabilizing influence on the economy.

The annual inflation data revealed a notable divergence, with energy prices decreasing by 3.6% whereas food price inflation increased to 3.3%.

Indicators suggest that underlying inflation will stabilize around the long-term target of 2%, as evidenced by a moderation in wage growth and compensation costs.

Although short-term consumer inflation expectations have risen amidst trade tensions, longer-term expectations remain anchored around 2%.

Risks to the economic growth outlook are predominantly skewed to the downside, with potential escalations in global trade tensions posing threats to both investment and consumption.

Geopolitical developments, including ongoing conflicts, continue to inject uncertainty into the euro area’s economic prospects.

If these tensions are resolved favorably, growth could exceed current projections.

Risk-free interest rates have remained stable since the last council meeting, while equity prices have increased, and corporate bond spreads have narrowed owing to improved trade sentiment.

The average interest rate for new loans to firms declined, further supporting borrowing conditions.

The ECB remains committed to ensuring stability in the financial system while pursuing its inflation goals.

The Governing Council indicated that future interest rate decisions would remain data-driven, assessing economic and financial indicators to determine the optimal monetary policy stance.

In light of the current complexities, the ECB's stance advocates for flexibility and responsiveness to evolving economic conditions.