The European Central Bank held its key interest rate steady at 2% on Thursday, marking a pause in the rate cutting cycle that began in June 2024. The decision comes as eurozone inflation holds steady around the central bank’s 2% target, supported by falling energy prices and a slowdown in services inflation. The market reaction was muted, as the hold was widely expected.
“Domestic price pressures have continued to ease, with wages growing more slowly. Partly reflecting the Governing Council’s past interest rate cuts, the economy has so far proven resilient overall in a challenging global environment. At the same time, the environment remains exceptionally uncertain, especially because of trade disputes,” said ECB President Christine Lagarde. She added that the decision was unanimous.
The central bank did not provide explicit guidance on the future path of interest rates, and it reiterated its data-dependent and meeting-by-meeting approach. “We are in a good position to hold and observe. We will have new projections in September, and we will continue to assess the situation meeting by meeting,” Lagarde said at the press conference. “We are confident that the inflationary phase of the past few years is now behind us.”
Is 2% a Reasonable Level for Interest Rates?
“The ECB’s calls on interest rates have been a large success, cutting fast and hard over the last year or so. Particularly considering recent criticism of the US Federal Reserve by the current administration. GDP is incrementally improving across the eurozone, while inflation has been moving in the other direction,” says Michael Field, Morningstar’s chief European market strategist.
Field continues: “Investors will not be disappointed that the incremental cuts to rates have come to a halt. 2% represents a very reasonable level for interest rates, one which should be very supportive of businesses across Europe looking to borrow and invest in the coming months and could bolster equity markets here.”
What Are the Key ECB Interest Rates?
As of June 11, the three ECB key interest rates are:
Deposit facility rate: 2.00%Main refinancing rate: 2.15%Marginal lending facility: 2.40%
Thursday’s decision comes after a quarter-point cut in June, which marked the eighth cut in just over a year. The US Federal Reserve and the Bank of England opted to keep their rates steady in June, while the Swiss National Bank cut its rates to 0%.
Is the Rate-Cutting Cycle Coming to an End?
ECB officials had been dampening expectations of an imminent interest rate cut, and swaps markets assigned a very low probability of a cut in July. “Our interest rates are in a good place, and the bar for another cut is very high,” ECB executive board member Isabel Schnabel said in a recent interview with Econostream Media. “There would only be a case for another rate cut if we saw signs of a material deviation of inflation from our target over the medium term.”
Mark Wall, chief European economist at Deutsche Bank, says the ECB needs to keep its options open amid high uncertainty. He also raises the prospect of a potential rate rise. “As effectively telegraphed by Lagarde, the ECB paused the easing cycle in July,” he explains. “The question is, will this be a short pause or a long pause? And could this be a pause that sees 2% policy rates eventually become the terminal rate in this easing cycle?”
Wall continues: “But if trade uncertainty fades, the combination of a resilient economy and significant fiscal easing will eventually translate into upside risks to inflation. Markets are not far away from switching focus from the last cut to the first hike.”
Dave Chappell, senior fund manager at Columbia Threadneedle, says: “The easing door was abruptly closed at the last ECB meeting, when President Lagarde unambiguously stated that, for now at least, the policy destination had been reached. However, with the euro area still scrambling to reach some form of trade agreement with the US ahead of the Aug. 1 deadline and the euro retaining its recent strength, the risks to growth and inflation appear to the downside in the near term before Germany’s fiscal support kicks in. While markets see just one more 25-point rate cut before year-end, the ECB may find that its policy destination is nothing more than a brief stopover.”
When Are the Next ECB Meetings in 2025?What do Policymakers Think About the Strong Euro?
The ECB appears broadly comfortable with the euro’s appreciation against the US dollar, which reflects Europe’s improving growth outlook and the market assessment of the tariff impact. “The current situation risks undermining the exorbitant privilege of the US dollar—a privilege the United States has enjoyed over many decades,” says ECB’s Schnabel. “This offers a historic chance for the euro area to strengthen the euro’s international role as a global reserve, invoicing, and funding currency.”
Asked about the currency on Thursday, Lagarde said, “We do not target the exchange rate, but we monitor it because it’s important for assessing inflation.”
Carsten Brzeski, global head of macro at ING, says, “Even though we can’t see the ECB making the same mistake twice by naming any inflation undershooting as transitory, chances are low that the central bank will react to the recent strengthening of the euro. As long as the stronger euro appears to be driven by fundamentals (though more policy than economic fundamentals), the ECB will simply stand on the sidelines.”
How do Rate Cuts Affect Investors?
Equity markets tend to rise on anticipated rate cuts. 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 on yields.
Meanwhile, savings account rates will fall, which impacts cash savers. In contrast, borrowers benefit as consumer debt and mortgages become cheaper.