The European Central Bank (ECB) will continue to lower interest rates in the next months. This increasingly dovish policy stance helps counteract the pressures of slowing economic growth and escalating global trade tensions. The combined effect of these recent decisions by the ECB has been to lower its deposit facility rate to 2.25%. That would be the lowest level since January of this year. Monetary policy experts believe this short-term rate could drop even more to 1.5% by September, reflecting a historic change in the direction of monetary policy.
Analysts’ predictions put the amount of easing to come from the ECB at another 75 bps over the next three meetings. There is a growing sentiment that the bank might adopt a more aggressive approach, with a 30% probability of faster cuts. In recent days, economists have sounded alarms over a fragile, deflationary eurozone economy. Consequently, the ECB is remaining on guard in its upcoming policy-making.
Economic Context and ECB’s Strategy
Yet the context of the ECB’s decision-making is a tangled web of economy and politics. The central bank has stressed that all its decisions will be data-driven and judged on a meeting-by-meeting basis. In her opening statement, ECB President Christine Lagarde revealed that some members of the Governing Council had thought about holding rates steady. That was even before the dramatic recent surge in trade tensions.
Goldman Sachs economist Sven Jari Stehn noted that the ECB’s recent communications have a “largely dovish” character. This change signals officials’ growing concerns about the fragility of the eurozone’s growth outlook. He added, “They saw a strong drop in services inflation … They saw that the effects of trade tensions on inflation are still unclear.” This acknowledgment of persistent economic uncertainty based on market conditions further highlights the challenge before the ECB as it continues to forge ahead.
Gian Marco Salcioli, the global head of markets strategy at Intesa Sanpaolo echoed this sentiment. As he described it, “There is a bearish and dovish mood pervading almost all quarters…manifest in the language, and action of the Governing Council cranking in Frankfurt. He urged the audience not to miss the window that’s opening. This would make it possible for the deposit rate to fall below 2% following the most recent cut.
Market Reactions and Predictions
Reactions from the markets to the ECB’s policy stance have proved spectacular in their ferocity. The German 2-year Schatz yield was down to 1.68%. That’s a six basis point decrease and hits levels not seen in three years. Closer to home, the 10-year Bund yield dropped, closing at 2.47%. Both movements are indicative of traders’ expectations about the next moves the Fed will make on interest rates.
Market participants are using overnight index swaps—OTC derivatives—as instruments to bet on future interest rate hikes or cuts. For the rest of 2025, they now expect 66 bps of cuts. This change shows that European financial markets are correcting their expectations with the dovish forward guidance of the ECB.
Danske Bank analysis still feels good about their call for 25-basis-point cuts at upcoming meetings. They forecast that the deposit rate will fall to 1.50% in September 2025. Their analysis comes through with a note of cautious optimism still seen through the lens of pre-COVID economic reality.
The Road Ahead for the ECB
As the ECB works to find its way through these unprecedented economic waters, uncertainty is still the biggest worry. Carsten Brzeski, ING’s global head of macro, told us that the extraordinarily high degree of uncertainty is still the debtor issue for the ECB. He highlighted the increased likelihood that it will miss its inflation target. He pointed to an “increased sense of urgency” within the bank as it reacts to changing economic conditions.
To the dismay of ECB hawks, ECB leaders have taken a particularly strong unanimous stand to become more dovish. This change really underscores how dramatic their turn of mood has been. This collective acknowledgment of economic pressures reflects a broader understanding that decisive action may be necessary to support eurozone growth.
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