ECB interest rate cut well justified
Lena Dräger, Research Director of the Monetary Macroeconomics Group at the Kiel Institute, comments on the expected decision by the European Central Bank (ECB) to lower its key interest rate by 25 basis points to 2 percent today:
"The seventh consecutive interest rate cut represents a continuation of the ECB's monetary policy shift from restrictive to neutral. Given the continued subdued growth momentum in the eurozone and an inflation rate that has recently fallen back to moderate levels, such a move is well justified. With economic uncertainty remaining high, at a level of 2 percent the ECB also retains the option of adjusting interest rates in either direction.
In May 2025, the inflation rate in the eurozone stood at 1.9 percent, slightly below the ECB's target of 2 percent after having been at 2.5 percent at the beginning of the year. Core inflation is also declining, which reinforces the assessment that inflationary pressures are easing. The US government's erratic tariff policy has led to an appreciation of the euro and a decline in oil prices. Both factors have contributed to the decline in inflation in the eurozone being somewhat stronger than expected.
There is still considerable uncertainty about economic developments in the eurozone. On the one hand, the European economy proved more robust than expected in the first quarter of 2025, and the announced German investments in infrastructure and defense in particular are raising hopes of future increases in demand and thus an economic recovery. On the other hand, the economy is currently still stagnating, with export-oriented sectors in particular suffering from the ongoing tariff chaos in the US.
The coming months will show more clearly whether the eurozone economy is heading in a more positive or more negative direction. With its current interest rate decision, the ECB is retaining the instruments it needs to respond with an interest rate adjustment if necessary."
