The European Central Bank (ECB) announced a significant monetary policy shift on Thursday, lowering the deposit facility rate to 2%, down from a mid-2023 high of 4%. This decision, which reflects a cautious optimism regarding inflation trends in the euro zone, marks a 25-basis-point reduction aimed at fostering economic stability.
The ECB’s decision comes against the backdrop of a positive economic surprise, of the improving inflation figures. In May, euro zone inflation came in at 1.9%, dipping below the European Central Bank’s (ECB) long-held target rate of 2%. The central bank’s revised inflation expectations contributed to this decision, indicating a broader assessment of economic conditions across member states.
Christine Lagarde, President of the European Central Bank, gave a speech at the Hertie School in Berlin, Germany on May 26th, 2025. She provided some detail on the rationale for the rate cut in her remarks. She again stressed that they made the call on a recently revised assessment of the inflation picture. They took into account the general effectiveness of monetary policy transmission.
“In particular, the decision to lower the deposit facility rate – the rate through which the Governing Council steers the monetary policy stance – is based on its updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission.” – European Central Bank (ECB)
The euro zone economy expanded by 0.3% in the first quarter of 2025, suggesting a gradual recovery from previous economic challenges. Analysts suggested that traders had priced in a more than 99% chance for a quarter-point cut this go-round. This clear expectation shows the degree of market confidence in the ECB’s approach.
Considerations like a stronger euro and lower energy prices were key driving forces that led to this policy shift. Lagarde drew attention to risks that might still derail the euro zone’s economic recovery. The central bank is especially interested in plans by Europe to boost defense spending. They’re worried, too, about the uncertainty over U.S. President Donald Trump’s tariff policies.