The European Central Bank (ECB) cut its key interest rates by 25 basis points at its June policy meeting, marking the start of a cautious easing cycle amid signs that inflation is moving sustainably toward target.
ECB cuts rates, downgrades inflation & growth
The decision was underpinned by updated staff projections showing a continued moderation in price pressures and a stable, if modest, growth outlook.
Headline inflation is now expected to average 2.0% in 2025—down from a previous forecast of 2.3%—before easing further to 1.6% in 2026 (revised from 1.9%) and returning to the 2.0% target in 2027. Core inflation, which excludes volatile energy and food prices and is closely monitored by the ECB, is projected to fall from 2.4% in 2025 to 1.9% in both 2026 and 2027, reflecting easing wage pressures and improving supply dynamics.
On the growth front, Eurozone GDP is forecast to expand by 0.9% in 2025, accelerating modestly to 1.1% in 2026 (slightly revised down from 1.2%) and 1.3% in 2027. Growth will be supported by rising real household incomes, resilient labor market conditions, and increased public investment, particularly through EU-backed green and digital transition initiatives. However, external demand remains a source of downside risk, as heightened trade tensions and geopolitical uncertainty continue to weigh on exports and business sentiment.
Trade tensions effects
The ECB also released a scenario analysis showing that unresolved trade disputes could dampen both growth and inflation by reducing global demand and disrupting supply chains. Conversely, a resolution of trade frictions could provide a tailwind to both activity and prices.
Wage growth, while still elevated, is showing signs of deceleration. Importantly, corporate profit margins continue to absorb a significant portion of cost increases, helping to limit pass-through to consumer prices and supporting the ECB’s confidence in the inflation outlook.
Looking ahead, the ECB emphasized that future rate decisions will remain data-dependent and guided by a careful assessment of inflation trends, underlying economic dynamics, and the strength of monetary policy transmission. The Governing Council reiterated that it is not pre-committing to a specific rate path, allowing flexibility to respond to evolving conditions as the outlook becomes clearer.
