ECB Interest Rate Cut Takes the Deposit Facility Rate to 2%

The deposit facility rate is the rate through which the Governing Council steers the monetary policy stance. The ECB said the decision is based on its updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission, and that inflation is currently at around its 2% medium-term target.

New staff projections

The new Eurosystem staff projections published with the decision show:

• Headline inflation: an average of 2.0% in 2025, 1.6% in 2026 and 2.0% in 2027, with the 2025 and 2026 figures revised down by 0.3 percentage points since March, mainly reflecting lower energy price assumptions and a stronger euro.
• Core inflation: inflation excluding energy and food is expected to average 2.4% in 2025 and 1.9% in 2026 and 2027.
• Growth: real GDP growth averaging 0.9% in 2025, 1.1% in 2026 and 1.3% in 2027.

The ECB said uncertainty surrounding trade policies is expected to weigh on business investment and exports, especially in the short term, while rising government investment in defence and infrastructure will increasingly support growth. Staff scenarios suggest a further escalation of trade tensions would leave growth and inflation below the baseline.

Balance sheet and outlook

The asset purchase programme and pandemic emergency purchase programme portfolios continue to decline at a measured and predictable pace, as the Eurosystem no longer reinvests principal payments from maturing securities. The Governing Council said it will follow a data-dependent, meeting-by-meeting approach and is not pre-committing to a particular rate path. The Transmission Protection Instrument remains available to counter unwarranted, disorderly market dynamics.

What it means

For borrowers in the euro area, the cut feeds through to floating-rate loans and new lending linked to short-term rates, while savers and money market funds face lower returns. With inflation now close to target, the statement places weight on incoming data, so markets and corporate treasurers will be watching the coming meetings closely for signs of whether the easing cycle continues.

Sources

• European Central Bank: Monetary policy decisions (5 June 2025)
• European Central Bank: Key ECB interest rates