In a move aimed at stabilizing a weakening eurozone economy, the European Central Bank (ECB) has cut interest rates for the seventh time in a year, reducing its benchmark deposit rate by 25 basis points to 2.25%. The decision reflects growing concern over the economic fallout from ongoing U.S. tariffs and heightened global market volatility.
The rate cut is expected to bring immediate relief to tracker mortgage holders and further ease borrowing costs across the region. The ECB cited retreating post-pandemic inflation and escalating trade tensions as key reasons behind the policy shift.
“Increased uncertainty is reducing confidence among households and firms,” the ECB said in a statement. “Volatile markets and trade disruptions are tightening financing conditions and weighing on the euro area’s outlook.”
ECB President Christine Lagarde maintained a cautious tone, emphasizing that future decisions will remain “data-dependent.” Despite pressure from investors, she refrained from outlining a concrete path forward, underscoring the unpredictable global landscape.
Economists had largely predicted the cut, especially with fears that a potential trade war could shave 0.5 percentage points off eurozone growth. However, many analysts believe even that estimate may understate the true impact, as inflation projections continue to fall.
Energy prices are down, the euro is at record highs on a trade-weighted basis, and Chinese export shifts could flood the European market with cheaper goods. As a result, major financial institutions like HSBC have lowered their eurozone inflation forecasts to below the ECB’s 2% target.
While some investors expect two or even three more cuts this year, others are watching closely for signs that Germany’s upcoming fiscal stimulus could reverse course by 2026. UBS economist Reinhard Cluse warns that the ECB may need to hike rates again by late 2026 to prevent inflation from overshooting.
For now, the ECB walks a tightrope—easing policy to combat short-term stagnation while keeping one eye on longer-term inflation risks.