FRANKFURT—The European Central Bank reduced its key interest rate to the lowest level since early 2023, and signaled it is nearing the end of its rate-cutting cycle as inflation abates.
The ECB on Thursday cut its deposit rate to 2% from 2.25%, its eighth reduction in a year. The move deepens a divergence with the U.S., with benchmark borrowing costs now more than 2 percentage points lower in Europe. That gap has become ammunition for Trump’s criticism of the Federal Reserve, which hasn’t cut rates this year.
Inflation has fallen back toward the central bank’s 2% target, with wage growth and energy prices moderating and a stronger euro weighing on import prices.
The key point
ECB President Christine Lagarde said in a press conference following the decision that the central bank is likely “getting to the end of the monetary-policy cycle.”
Investors trimmed bets on future cuts. Markets are now fully pricing in just one cut by the end of the year according to LSEG data. Before the decision, investors had been split between bets on one or two more rate reductions. The euro and government-bond yields rose following the decision.
The context
The ECB cut its inflation forecasts, now expecting price growth to fall to its target of 2% this year and reach 1.6% next year.
The outlook for growth, meanwhile, is being muddled by roller-coaster U.S. tariff policy. An export surge gave many European economies a temporary boost in the first quarter, as companies rushed to get shipments to the U.S. ahead of tariffs. But growth is likely to slow as tariffs bite.
Most exports to the U.S. face a 10% tariff, and levies could rise if the European Union and the U.S. don’t reach a trade deal by the White House’s July 9 deadline. A rising euro is another headache for companies, making exports more expensive and U.S. profits worth less when converted into euros. The ECB still expects the economy to grow 0.9% this year, but nudged down its 2026 expectation in a new forecast released Thursday.
The leadership question
Lagarde shot down speculation that she could leave her post early to become the head of the World Economic Forum . Her term is set to end in late 2027.
“I can very firmly tell you…I’m determined to complete my term,” she said. “So I regret to tell you that you’re not about to see the back of me.”
ECB vs. Fed
The ECB’s string of rate cuts has drawn the attention of Trump. The president has repeatedly criticized Fed Chair Jerome Powell for not bringing borrowing costs down faster. Trump reignited his criticisms of Powell on Wednesday after a weak ADP jobs report.
“‘Too Late’ Powell must now LOWER THE RATE. He is unbelievable!!! Europe has lowered NINE TIMES!” he wrote on social media. The ECB had cut rates seven times in its current cycle at the time of his post.
The Fed cut rates by 1 percentage point last year but has been on hold since December. Tariffs are expected to drive up U.S. inflation, leading the Fed to approach cuts more cautiously than its counterpart in Frankfurt, where inflation is now less of a concern. The Organization for Economic Cooperation and Development recently forecast U.S. inflation would accelerate to 3.9% by year-end, preventing the Fed from cutting rates again until next year.
Write to Chelsey Dulaney at [email protected]