Will the European Central Bank Cut Interest Rates on June 5?
The European Central Bank is widely expected to lower the deposit rate by another 0.25 percentage points to 2% on June 5, marking its eighth interest rate cut in an easing cycle that may be nearing its end. The decision comes amid a brightening economic outlook for the eurozone, despite ongoing uncertainty triggered by US President Donald Trump’s trade tariffs.
Michael Field, Morningstar’s chief European equity market strategist, says that inflation in the eurozone is firmly under control.
“Unlike in the US where, largely thanks to tariff threats, resurging inflation is a serious likelihood, in Europe, central banks feel they have a decent grip on it. Inflation in the euro area currently stands at just 2.2%, within touching distance of the bank’s 2% target, allowing the ECB to safely take another step in the direction of lower interest rates.”
Eurozone inflation for May is expected to have dropped below 2% in data released on June 3.
Current eurozone interest rates allow the central bank a lot of control, Field adds.
“From here it has the ability to cut or raise rates significantly in dealing with changing economic conditions. Something it can’t do when rates are at zero, or indeed 4%.”
What Are the Key ECB Interest Rates?
As of April 23, the three ECB key interest rates are:
- Deposit facility rate: 2.25%
- Main refinancing rate: 2.40%
- Marginal lending facility: 2.64%
Is the ECB Rate-Cutting Cycle Coming to an End?
Markets increasingly see the June cut as the penultimate move in the current easing cycle. Swap markets are nearly fully pricing in a 0.25 percentage point cut on June 5, while expectations for a third cut in September are just above 50%. Overnight index swaps imply a lower probability for a cut on July 24, the next meeting after June.
Ulrike Kastens, senior economist at DWS, expects the ECB to cut rates by 0.25 percentage points in June and again in July before pausing.
“We see room for one more cut after June, but the air gets thinner from here as inflation moderates and growth rates stabilize,” she says.
“Monetary policy clearly is no longer restrictive. Lending is picking up, perhaps less so for businesses, but growth rates are decent in the real estate sector. This shows that interest rates are no longer an obstacle.”
In contrast to current market expectations, analysts at German bank Helaba see the easing cycle come to a provisional halt after a June cut with a high probability of a longer monetary policy holding phase.
“In the second half the year, the ECB is likely to shift into a wait-and-see mode. While markets are pricing in another rate cut (in July), the announced shift toward more expansive fiscal policy argues against further monetary easing,” the bank’s analysts say.
There is also growing division within the ECB’s governing council. Robert Holzmann, governor of Austria’s central bank, has argued for holding rates steady until at least September. He argues that the policy rate has already reached a neutral level, which he places between 2.5% and 3%. Isabel Schnabel, executive board member, also warns that premature cuts could stoke inflation amid trade tensions.
In contrast, François Villeroy de Galhau, governor of the Bank of France, said in a speech on May 27 that the normalization of policy is “probably not complete” and emphasized that weak business activity and falling inflation justify continued accommodation.
What Do Trade Tensions With the US Mean for the Eurozone Economy?
With Trump threatening a 50% tariff on EU goods—now delayed until July 9—trade policy has become a major source of macroeconomic uncertainty.
But in the first quarter of 2025, eurozone GDP grew by 0.3% quarter-on-quarter, slightly above expectations of 0.2%. Germany, the bloc’s largest economy, also surprised to the upside, expanding by 0.4%, compared with a consensus forecast of 0.2%. Driven mostly by the German fiscal policy turnaround, economists at Berenberg project eurozone growth to pick up modestly from 0.8% in 2024 to 1% this year, 1.4% in 2026 and 1.5% in 2027.
ECB Likely to Revise GDP and Inflation Projections
As the eurozone economy has shown more resilience than the ECB previously projected, the central bank’s economists are likely to revise their GDP forecasts upward in their quarterly forecast on June 5. In their last forecast in March, ECB staff forecast eurozone GDP growth of 0.9% for 2025, down from 1.1% in the December meeting, and 1.2% for 2026, compared with 1.4% in its December forecast.
Ulrike Kastens of DWS says those estimates are too conservative: “Eurozone growth outlook is improving thanks to fiscal stimulus and signs of normalization in the manufacturing cycle. Many companies had built up inventories. In addition, export expectations are picking up again despite tariff uncertainty.”
The uptick is reflected in the eurozone manufacturing PMIs, which rose to a 33-month high of 49.4 in May from 49.0 in April, but still below the line that separates contraction from expansion.
After the strong first-quarter data, DWS now expects 1.1% GDP growth in the eurozone in 2025, up from a previous forecast of 0.9%, and 1.4% in 2026.
Kastens also expects ECB economists to revise down their inflation forecasts from their first-quarter predictions.
Preliminary data for France showed May inflation slowed to 0.6% year over year, well below expectations. FactSet consensus forecasts show the rate of headline inflation falling to 1.9% in May, with core inflation also falling to 2.3%.
Can the Euro Unseat the Dollar as the Global Currency?
Amid growing concerns over US fiscal policy and geopolitical unpredictability, global investors are increasingly seeking alternatives to the US dollar. While the dollar remains the top global currency, accounting for around 58% of foreign-exchange reserves, that figure is declining, indicating a potential shift in the international monetary system. The euro holds the second position at roughly 20%.
ECB President Christine Lagarde called this a potential “global euro moment.”
In a speech on May 26, she said the shifting global landscape offers a chance for the euro to strengthen its international role—a move that could help lower borrowing costs and make the eurozone more economically resilient. “The euro will not gain influence by default—it will have to earn it,” she said.
Lagarde laid out three pillars to elevate the euro’s international role: maintaining open trade backed by stronger security cooperation, economic strength supported by deeper and more liquid capital markets, and a stable legal framework.
“We must bolster our legal foundation by defending the rule of law—and by uniting politically so that we can resist external pressures,” she said.
How Do Interest Rate Cuts Affect Investors?
Equity markets tend to rise on anticipated rate cuts. Morningstar’s Field says that bringing down the deposit rate to 2% would further boost equity markets in Europe at a key juncture, when business and consumer confidence is low.
In bond markets, falling interest rates mean lower yields, which pushes bond prices higher. Lower rates also make existing bonds, particularly those already issued during a period of high rates, more attractive for yields.
Meanwhile, cash savings rates on bank accounts will likely decrease, to the detriment of savers. The rates that savers receive depend mostly on the deposit facility, which defines the interest banks receive for depositing money with the ECB overnight. Borrowers, by contrast, benefit from lower rates as consumer debt and mortgages become cheaper.
When Are the Next ECB Meetings in 2025?
- July 24, 2025
- Sept. 11, 2025
- Oct. 30, 2025
- Dec. 18, 2025