Will the ECB Lower Interest Rates at the June Policy Meeting?

The European Central Bank (ECB) is set to announce its latest policy decision on Thursday, which is likely to affect market sentiment regarding the euro. The market expects the ECB to continue with easing measures at the June meeting, implementing another 25 basis point cut to reduce the deposit rate to 2.00%. This would represent the fourth cut in 2025 and the eighth in the current cycle. Money markets are holding their bets for interest rate reductions in June’s meeting, anticipating an overall reduction of 60 bps in the key interest rate by year-end. However, recent softer inflation numbers, lingering below the central bank’s expectations, may influence the outlook for policy easing, potentially impacting policymakers’ perspectives. 

What Is the ECB Expected to Do?

The ECB is expected to lower its interest rates after its policy meeting on Thursday, reducing the benchmark rate from 2.25% to 2.00%. Although markets have mostly priced in this rate cut, the ECB’s forward guidance remains a key focus. Policymakers have expressed caution about the path of future rate changes, citing uncertainties arising from global trade tensions and their potential impact on the eurozone economy.

ECB officials, including Governor François Villeroy de Galhau, have stated that although there is potential for further rate cuts, the central bank must stay attentive to changing economic circumstances. This careful stance demonstrates the need to balance economic growth support with price stability. He also mentioned that policy normalisation in the euro area is likely not finished. However, ECB policymaker Robert Holzmann observed that the ECB should pause further interest rate cuts until at least September, as there is no evident reason to lower the interest rates. He emphasised that any additional rate cut won’t have an effect on economic activity, as economic activity is held back by uncertainty rather than restrictive monetary policy. The ECB’s Executive Board member Fabio Panetta echoed Holzmann’s sentiment, implying that there is reduced room to cut rates further. Still, the macro outlook remains weak, and trade tensions could worsen it.

The recent European Central Bank (ECB) policy meeting in April revealed that policymakers had increased confidence that inflation would return to target, in line with the March baseline projections. The central bank also communicated through a policy statement that it maintains its commitment to a ‘data-dependent’ and ‘meeting-by-meeting’ approach for future decisions, emphasising that policy is not on a ‘pre-set’ path.

Will Mixed Economic Data Alter the ECB’s Policy Decision?

Recent economic data indicated that the eurozone economy expanded by 0.3% in the first quarter of 2025 (Q1), revising the preliminary reading of 0.4%. Meanwhile, the bloc’s Gross Domestic Product (GDP) grew at an annual rate of 1.2% in Q1, confirming the initial estimate, as anticipated.

The eurozone Harmonised Index of Consumer Prices (HICP) rose by 1.9% year-over-year in May, down from 2.2% in April, according to official data released by Eurostat on Tuesday. The reading came in just below market expectations of 2.0%. Core HICP, which excludes volatile items such as energy and food, increased by 2.3% annually in May, easing from 2.7% in April and missing the consensus forecast of 2.5%. On a monthly basis, headline inflation was flat in May, following a 0.6% rise in April. Similarly, core inflation registered no change from the previous month after a 1.0% gain in April. The HCOB Eurozone Composite PMI came in at 50.2 in May, slightly lower than April’s 50.4 but still above market expectations of 49.5, indicating modest expansion in economic activity. The Services PMI, however, dipped into contraction territory, falling to 49.7 from 50.1 in the previous month. Despite the decline, it surpassed the forecasted reading of 48.9. The European Central Bank (ECB) targets a 2.0% inflation rate, significantly shaping market anticipation regarding the ECB’s future interest rate decisions.

EU–US Trade Deal Optimism’s Impact on the Euro

With US President Donald Trump’s broad tariffs under review by a federal court, the Trump administration persists in advocating for tariffs against the United States’ prominent trading partners. The 50% tariff threat announced by Trump last Friday triggered turmoil in the markets regarding the European Union. Nevertheless, the administration seems to have accelerated talks between the two nations. Despite recent EU economic data underscoring the economy’s fragility, EU Trade Commissioner Maroš Šefčovič and US officials, including Commerce Secretary Gina Raimondo and Trade Representative Katherine Tai, appear to be advancing in their discussions. The EU has suggested a “zero-for-zero” tariff deal on industrial goods, including automobiles, and is willing to boost imports of US products like soybeans, liquefied natural gas, and defence equipment. Meanwhile, Trump is urging the EU to amend or eliminate particular non-tariff barriers, such as food safety regulations and digital services taxes, which the Trump administration views as obstacles to fair and reciprocal trade.

The rising tensions between the US and China complicate this week’s economic developments further. President Trump’s decision to double tariffs on steel and aluminium imports to 50% was anticipated by many as a negotiation strategy, yet it still generates uncertainty regarding the direction of trade policy. China’s claim that the US has breached their recent trade agreement indicates that the relationship between the two largest economies in the world is still precarious. This volatility might affect central bank considerations and market responses to economic data.

The interplay between trade policy and monetary policy decisions is becoming increasingly significant, as central banks must consider the potential economic consequences of trade disruptions when setting interest rates. The ECB’s decision may reflect concerns regarding the impact of trade wars on European growth.

Will the Russia–Ukraine Conflict Dampen the Euro?

The Russia–Ukraine conflict continues to alter Europe’s economic and security dynamics. Energy prices are unstable due to attacks on infrastructure and supply uncertainties, while inflation remains a concern driven by disrupted grain exports and increased defence spending. European nations have enhanced their military preparedness and cybersecurity measures, especially along NATO’s eastern border. The war has led to new waves of refugees, putting pressure on social services in countries like Poland and Germany. Politically, the conflict has challenged EU unity, revealing some disagreements over sanctions and peace approaches; however, it has also spurred energy diversification and a renewed emphasis on EU expansion, especially regarding Ukraine’s application for membership.

Amid ongoing instability, the euro remains sensitive to geopolitical shocks, with its trajectory increasingly influenced by inflation dynamics, fiscal responses, and the European Central Bank’s balancing act between growth and monetary tightening.

What Will Investors Watch Next?

Taking a broader view, mounting downside growth risks, a lower inflation profile, and continued elevated trade uncertainty will likely lead to further rate cuts ahead. Investors will look to President Lagarde’s post-meeting press conference for fresh insights on the ECB’s future monetary policy outlook.