The European Central Bank (ECB) on Thursday announced a 25 basis point cut to its three key interest rates, marking a shift in its monetary policy stance.
The decision, taken by the ECB’s Governing Council, reflects an updated assessment of inflation trends and the strength of monetary policy transmission.
“The disinflation process is well on track,” the ECB stated, adding that “inflation has continued to develop broadly as staff expected.”
The central bank now projects headline inflation to average 2.3 per cent in 2025, 1.9 per cent in 2026, and 2.0 per cent in 2027.
The upward revision for 2025 is attributed to stronger energy price dynamics.
Despite progress in reducing inflation, the ECB acknowledged that “domestic inflation remains high, mostly because wages and prices in certain sectors are still adjusting to the past inflation surge with a substantial delay.”
However, it noted that “wage growth is moderating as expected, and profits are partially buffering the impact on inflation.”
The rate cut signals a shift towards less restrictive monetary policy, which the ECB expects to make borrowing cheaper for businesses and households.
“Monetary policy is becoming meaningfully less restrictive, as the interest rate cuts are making new borrowing less expensive for firms and households, and loan growth is picking up,” the ECB explained.
However, the central bank warned that the full effects of previous rate hikes are still filtering through the credit system, meaning lending remains subdued overall.
Economic growth projections have been revised downward, with the ECB forecasting GDP growth of 0.9 per cent in 2025, 1.2 per cent in 2026, and 1.3 per cent in 2027.
“The downward revisions for 2025 and 2026 reflect lower exports and ongoing weakness in investment, in part originating from high trade policy uncertainty as well as broader policy uncertainty,” the ECB noted.
Looking ahead, the ECB remains committed to ensuring inflation stabilises at 2 per cent over the medium term.
It stressed that its approach will remain data-dependent and decided on a meeting-by-meeting basis.
“The Governing Council is not pre-committing to a particular rate path,” the ECB said.
Instead, future rate decisions will be “guided by incoming economic and financial data, inflation dynamics, and monetary policy transmission”.
