ECB makes eighth cut this cycle

As expected, the European Central Bank (ECB) cut its policy rates today for the eighth time in this cycle, marking its seventh straight cut. The interest rates on the main refinancing operations, the marginal lending facility, and the deposit facility were each lowered by 25 basis points to 2.15%, 2.40% and 2.00%, respectively.

With the cumulative easing since June last year now totaling 200bps, and with inflation showing increased signs of stabilizing towards its target, ECB President Christine Lagarde noted that the central bank is in a good position to face uncertainties ahead, notably on evolving U.S. trade policy. While Lagarde kept the door open for additional rate cuts, the ECB has likely earned some leeway on responding to materializing trade policy risks, especially with increasing fiscal spending providing a significant offset.

Recent developments

While risks to growth remain tilted to the downside amid the ongoing trade war, several factors are keeping Eurozone growth resilient, including a solid labor market, robust balance sheets, and easing financial conditions. A pull-forward of activity ahead of the U.S. tariffs has also buoyed growth in Q1 and is likely to provide some momentum through the rest of the year. Moreover, there have also been increased signs that inflation is likely to stabilize and move closer towards the ECB’s 2% target as wage pressures continue to ease.

As a result, ECB President Lagarde has characterized that the ECB is well-positioned to navigate the uncertainties ahead. While she left the door open for additional rate cuts, she acknowledged that the ECB is getting close to the end of the monetary policy easing cycle. Additional rate cuts will likely depend on the evolution of the economy amid trade policy risks materializing in the months ahead, particularly with ongoing trade negotiations between the EU and the U.S. Indeed, trade policy is likely the largest source of uncertainty to policymakers currently, particularly given the erratic nature of U.S. trade policy.

Forecast changes

The updated ECB staff projections showed a notable downgrade to inflation in 2026, driven by a combination of lower energy prices and a stronger euro. Inflation is now projected to grow 1.6% in 2026, down from the previous 1.9% forecast, and 2027 inflation is forecasted to grow 2%. These projections suggest that the ECB has greater visibility and conviction on inflation reaching its 2% target on a sustained basis.

ECB growth projections were modestly downgraded for 2026, with GDP expected to grow 1.1%, slightly down from the previous 1.2%, as trade policy uncertainty is likely to further weigh on economic activity. However, the fiscal spending boost—particularly on defense and infrastructure—should provide significant stimulus to offset the negative impact of tariffs and support growth going forward.

Policy outlook

With economic activity holding up better than expected, and with inflation showing increasing signs of stabilizing closer towards the ECB’s target, the central bank is in a good position to assess incoming risks before embarking on additional rate cuts. Investors should not get too complacent with encouraging signs from the ECB, however, as trade policy uncertainty remains extremely elevated and is likely to continue to drive the economic outlook and sentiment going forward. Therefore, while the door remains open for additional easing from the ECB this year, they may no longer come at consecutive meetings.

Principal Asset Management