European Central Bank Lowers Key Interest Rates Amid Inflation and Growth Projections
The ECB implements a 25 basis points reduction in interest rates as inflation stabilizes at the target level.
On June 5, 2025, the Governing Council of the European Central Bank (ECB) announced a decision to lower its key interest rates by 25 basis points.
This adjustment impacts the deposit facility rate, which serves as a primary tool for steering monetary policy.
The decision comes in light of the latest assessment regarding inflation projections, underlying inflation trends, and the effectiveness of monetary policy transmission.
Currently, inflation aligns with the ECB's medium-term target of 2%.
According to the updated Eurosystem staff projections, headline inflation is expected to average 2.0% in 2025, 1.6% in 2026, and rebound to 2.0% in 2027. These figures reflect downward revisions of 0.3 percentage points for both 2025 and 2026 compared to previous estimates, attributed to lower anticipated energy prices and a stronger euro.
Excluding energy and food, inflation is projected to average 2.4% in 2025 and 1.9% in 2026 and 2027, showing minimal change since earlier forecasts.
Real GDP growth projections indicate an average increase of 0.9% in 2025, 1.1% in 2026, and 1.3% in 2027. The growth projection for 2025 remains unchanged amid a stronger-than-expected Q1 performance but reflects subdued expectations for the rest of the year.
Trade policy uncertainty is anticipated to negatively impact business investments and exports in the short term, although increased government spending in defense and infrastructure is expected to bolster growth over the medium term.
Rising real incomes alongside a robust labor market are anticipated to boost household spending.
Favorable financing conditions are also predicted to enhance the economy’s resilience to external shocks.
The Governing Council highlighted that various illustrative scenarios regarding trade policy could significantly impact both growth and inflation.
These scenarios will be publicly available in the staff projections released on the ECB's website.
Should trade tensions escalate, growth and inflation may fall below baseline projections.
Conversely, a favorable resolution of trade conflicts could lead to better-than-expected growth and inflation outcomes.
Most underlying inflation indicators suggest the average will stabilize around the ECB's 2% target in the medium term.
Although wage growth persists at elevated levels, it has shown signs of moderation, with corporate profits partially mitigating inflationary pressures.
Concerns regarding potential tightening of financing conditions due to uncertainty from trade tensions have diminished.
The Governing Council is committed to ensuring inflation stabilizes sustainably at 2%.
In light of current uncertainties, the Council plans to adopt a data-dependent and meeting-by-meeting approach to monetary policy decisions, without precommitting to any specific rate trajectory.
Effective June 11, 2025, the new key interest rates will be set at 2.00% for the deposit facility, 2.15% for main refinancing operations, and 2.40% for the marginal lending facility.
The ECB's asset purchase programs, including the Asset Purchase Programme (APP) and the Pandemic Emergency Purchase Programme (PEPP), are set to decline at a steady pace as the Eurosystem ceases reinvestment of principal payments from maturing securities.
Additionally, the Governing Council is prepared to utilize all available instruments to maintain price stability while ensuring the smooth function of monetary policy transmission across euro area countries.
The Transmission Protection Instrument remains ready to address any disorderly market dynamics that could threaten effective monetary policy implementation.
The President of the ECB is scheduled to further elaborate on the rationale behind these monetary policy decisions at a press conference at 14:45 CET today.
This adjustment impacts the deposit facility rate, which serves as a primary tool for steering monetary policy.
The decision comes in light of the latest assessment regarding inflation projections, underlying inflation trends, and the effectiveness of monetary policy transmission.
Currently, inflation aligns with the ECB's medium-term target of 2%.
According to the updated Eurosystem staff projections, headline inflation is expected to average 2.0% in 2025, 1.6% in 2026, and rebound to 2.0% in 2027. These figures reflect downward revisions of 0.3 percentage points for both 2025 and 2026 compared to previous estimates, attributed to lower anticipated energy prices and a stronger euro.
Excluding energy and food, inflation is projected to average 2.4% in 2025 and 1.9% in 2026 and 2027, showing minimal change since earlier forecasts.
Real GDP growth projections indicate an average increase of 0.9% in 2025, 1.1% in 2026, and 1.3% in 2027. The growth projection for 2025 remains unchanged amid a stronger-than-expected Q1 performance but reflects subdued expectations for the rest of the year.
Trade policy uncertainty is anticipated to negatively impact business investments and exports in the short term, although increased government spending in defense and infrastructure is expected to bolster growth over the medium term.
Rising real incomes alongside a robust labor market are anticipated to boost household spending.
Favorable financing conditions are also predicted to enhance the economy’s resilience to external shocks.
The Governing Council highlighted that various illustrative scenarios regarding trade policy could significantly impact both growth and inflation.
These scenarios will be publicly available in the staff projections released on the ECB's website.
Should trade tensions escalate, growth and inflation may fall below baseline projections.
Conversely, a favorable resolution of trade conflicts could lead to better-than-expected growth and inflation outcomes.
Most underlying inflation indicators suggest the average will stabilize around the ECB's 2% target in the medium term.
Although wage growth persists at elevated levels, it has shown signs of moderation, with corporate profits partially mitigating inflationary pressures.
Concerns regarding potential tightening of financing conditions due to uncertainty from trade tensions have diminished.
The Governing Council is committed to ensuring inflation stabilizes sustainably at 2%.
In light of current uncertainties, the Council plans to adopt a data-dependent and meeting-by-meeting approach to monetary policy decisions, without precommitting to any specific rate trajectory.
Effective June 11, 2025, the new key interest rates will be set at 2.00% for the deposit facility, 2.15% for main refinancing operations, and 2.40% for the marginal lending facility.
The ECB's asset purchase programs, including the Asset Purchase Programme (APP) and the Pandemic Emergency Purchase Programme (PEPP), are set to decline at a steady pace as the Eurosystem ceases reinvestment of principal payments from maturing securities.
Additionally, the Governing Council is prepared to utilize all available instruments to maintain price stability while ensuring the smooth function of monetary policy transmission across euro area countries.
The Transmission Protection Instrument remains ready to address any disorderly market dynamics that could threaten effective monetary policy implementation.
The President of the ECB is scheduled to further elaborate on the rationale behind these monetary policy decisions at a press conference at 14:45 CET today.
AI Disclaimer: An advanced artificial intelligence (AI) system generated the content of this page on its own. This innovative technology conducts extensive research from a variety of reliable sources, performs rigorous fact-checking and verification, cleans up and balances biased or manipulated content, and presents a minimal factual summary that is just enough yet essential for you to function as an informed and educated citizen. Please keep in mind, however, that this system is an evolving technology, and as a result, the article may contain accidental inaccuracies or errors. We urge you to help us improve our site by reporting any inaccuracies you find using the "Contact Us" link at the bottom of this page. Your helpful feedback helps us improve our system and deliver more precise content. When you find an article of interest here, please look for the full and extensive coverage of this topic in traditional news sources, as they are written by professional journalists that we try to support, not replace. We appreciate your understanding and assistance.