The European Central Bank lowered interest rates by 25 basis points to 2% on June 5, marking its eighth cut since last June. The move, which brings the policy rate into what president Christine Lagarde called a “neutral” zone, came as no surprise to markets. However, with trade tensions simmering, global growth losing momentum, and inflation cooling at home, investors were less focused on the cut and more on what the ECB might do next.
“At the current level, we believe we are in a good position to navigate the uncertain circumstances that will be coming up,” Lagarde stated.
With eurozone inflation falling to 1.9% in May, market experts opined that the bank now has room to pause and assess global trade risks and uneven economic conditions.
Kaspar Hense, senior portfolio manager at RBC BlueBay Asset Management, described Lagarde’s tone as “rather dovish overall,” noting her emphasis on global uncertainties and geopolitical pressures. “Markets were hoping—in our view somewhat unreasonably—for an even more dovish outcome, which led yields to sell off and the euro to strengthen,” Hense said. Still, he acknowledged that for now, the ECB can credibly claim to have engineered a soft landing, with inflation in check and growth still in positive territory.
Max Stainton, senior global macro strategist at asset manager Fidelity International, noted that the ECB’s latest quarterly projections show a downgrade in inflation expectations for both 2025 and 2026—now seen at 2.0% and 1.6%, respectively. “While the statement provided little forward guidance, it was sandwiched by dovish colouring,” he observed, pointing to the ECB’s assessment that inflation is now “at target” and likely to remain so on a sustained basis.
Stainton also highlighted the broader macro context, pointing to April’s so-called ‘Liberation Day’ tariffs and the spillover effects on trade and inflation. “On the international front, euro strength, limited retaliation, and commodity softness have helped contain upside risks. Meanwhile, domestic indicators like services inflation and negotiated wages suggest continued disinflation.” He cautioned, however, that downside risks from trade tensions remain substantial. Fidelity’s outlook includes a projected 75bps growth hit to the eurozone from US tariffs, with inflation expected to stay below target well into 2026.
Ivo Mertens, chief economist at financial services platform iBanFirst, called the ECB’s rate cut a “decisive” step to support the eurozone’s fragile economy, which has been under pressure from slowing growth, disinflation, and global trade uncertainty. He noted that while the move brought short-term relief—evidenced by a bounce in European stock markets—it could trigger capital outflows to higher-yielding currencies such as the US dollar, pound sterling, and yen, potentially weakening the euro in the medium term.
Mertens added that although investor sentiment may benefit from hopes of improved economic conditions, the ECB’s action “lacks long-term reassurance” for internationally exposed businesses. In particular, small and medium-sized enterprises (SMEs), already under pressure from tight margins and higher borrowing costs, remain vulnerable. He warned that lingering uncertainty over US tariff policy—especially with the 90-day deadline tied to potential new trade measures—continues to weigh on future investment plans and the broader outlook for European corporate earnings.
Asset manager Franklin Templeton’s head of European fixed income, David Zahn, also pointed to a shift in tone. “The ECB cut rates by 25bps to 2.00%, as inflation eased to 1.9%. Slowing price pressures and softer growth supported the move, though the policy stance remains cautious,” he said. “A pause over summer is very likely as the ECB assesses trade risks and domestic resilience.” Zahn believes long-term policy direction will be shaped by fiscal rebalancing efforts and ongoing global headwinds, pushing the ECB toward a more neutral, possibly passive stance.
The “pause” was also highlighted by Schroders’ Eurozone Economist Irene Lauro, who stressed that while the cut was expected, a follow-up move in July looks increasingly unlikely. “With rates now at the midpoint of their estimated neutral range, the bar for further cuts has risen,” she said. Although services inflation fell sharply in May and lending data has improved, underlying conditions such as tight labour markets and improving domestic demand suggest the ECB may shift from urgency to patience. “We expect the ECB is likely to pause from today,” Lauro added.
According to market reaction, further rate cuts, if they come, will depend less on inflation and more on how geopolitical risks—particularly trade and fiscal developments—play out over the coming quarters.
As RBC’s Hense put it, “The last mile seems to have come to an end. Fiscal policy and risk, including trade, are set to be more balanced moving forward.”
