Euro holds near $1.14 as ECB cuts rates and lowers inflation outlook

The euro pared earlier gains but remained near the $1.14 mark on Thursday after the European Central Bank delivered a widely anticipated 25 basis point rate cut and revised its inflation outlook lower.

Euro holds near $1.14 as ECB cuts rates and lowers inflation outlook

The policy move, signaling the start of a cautious easing cycle, was accompanied by updated staff projections showing a further moderation in price pressures over the coming years. The ECB now expects headline inflation to average 2.0% in 2025, 1.6% in 2026, and return to 2.0% in 2027. The forecasts for 2025 and 2026 were revised downward by 0.3 percentage points from the March projections, driven primarily by softer energy prices and the appreciation of the euro, which reduces import costs. These factors, combined with easing supply chain constraints, have contributed to the disinflationary trend. Core inflation—which excludes energy and food and is closely watched by policymakers—remains more persistent. It is projected to average 2.4% in 2025 before easing to 1.9% in both 2026 and 2027. These figures are largely in line with the ECB’s previous estimates, reflecting steady progress toward price stability, although services inflation remains somewhat sticky due to wage dynamics. On the growth front, the ECB maintained a modest outlook for the euro area economy, with real GDP expected to expand by 0.9% in 2025, 1.1% in 2026, and 1.3% in 2027. Growth is expected to be supported by rising real incomes, solid employment levels, and public investment, though risks remain tilted to the downside amid ongoing global trade tensions and geopolitical uncertainties.

Inflation going toward ECB target

Policymakers emphasized that inflation is gradually moving toward the 2% medium-term target in a sustainable manner. Wage growth, though still elevated, is beginning to moderate, and firms are increasingly absorbing higher input costs through profit margins rather than passing them on to consumers—a dynamic that has helped ease price pressures. In its forward guidance, the ECB reiterated its commitment to a data-dependent, meeting-by-meeting approach to setting interest rates. The Governing Council refrained from signaling a predefined rate path, instead underscoring the importance of incoming data and the evolving inflation outlook in guiding future decisions. Markets interpreted the overall tone as dovish but measured, with traders now focusing on subsequent data releases and central bank communications for clues on the pace and scale of any additional easing.