The European Central Bank (ECB) has announced a reduction in its three key interest rates by 25 basis points. This decision, made by the Governing Council, is based on an updated assessment of inflation and the effectiveness of monetary policy transmission. The deposit facility rate, which plays a crucial role in steering monetary policy, is among those adjusted.
Currently, inflation hovers around the ECB’s medium-term target of 2%. According to new Eurosystem staff projections, headline inflation is expected to average 2.0% in 2025, decrease to 1.6% in 2026, and return to 2.0% in 2027. These figures represent a downward revision from March projections due to lower energy price assumptions and a stronger euro.
Inflation excluding energy and food is projected to average 2.4% in 2025 and stabilize at 1.9% for both 2026 and 2027. Real GDP growth is forecasted at an average of 0.9% in 2025, increasing slightly to 1.1% in 2026 and reaching 1.3% by 2027.
The unchanged growth projection for next year reflects strong performance early this year but weaker expectations for the remainder of the year. While trade policy uncertainties may impact business investment and exports short-term, government investments are anticipated to bolster growth over time.
The ECB staff also evaluated potential impacts of varying trade policies on growth and inflation through alternative scenarios. These scenarios will be available with staff projections on the ECB’s website.
Underlying inflation measures suggest stabilization around the ECB’s target of 2%. Wage growth remains high but shows signs of moderation, with profits absorbing some inflationary pressures.
Concerns about market volatility affecting financing conditions have diminished since April’s trade tensions eased somewhat.
The Governing Council remains committed to ensuring inflation stabilizes at its target sustainably. Decisions will be data-driven without pre-committing to specific rate paths.
Interest rates on the deposit facility, main refinancing operations, and marginal lending facility will be reduced to 2.00%, 2.15%, and 2.40%, respectively, effective June 11, 2025.
The Asset Purchase Programme (APP) and Pandemic Emergency Purchase Programme (PEPP) portfolios continue their measured decline as reinvestments cease.
The Governing Council is prepared to adjust its instruments as needed within its mandate to maintain price stability across all euro area countries using tools like the Transmission Protection Instrument against disorderly market dynamics.
ECB President will elaborate on these decisions at a press conference scheduled for today at 14:45 CET.
Information from this article can be found here.
