The European Central Bank (ECB) has delivered another interest rate cut in 2025, lowering all three key rates by 25 basis points, signalling a shift towards a less restrictive monetary policy. The decision reflects confidence in the disinflation process, with headline inflation projected to ease to 2.3 percent in 2025 before aligning with the 2 percent target in 2026 and 2027. However, rising energy prices and lingering wage adjustments remain inflationary risks.

While the cut aims to stimulate borrowing and investment, the economy still faces headwinds. Growth projections have been revised downward, with GDP now expected to expand by 0.9 percent in 2025, amid weak exports and investment uncertainty. Although rising real incomes and fading rate hike effects could eventually boost demand, subdued lending activity remains a constraint.

The Governing Council is cautious, stressing a data-dependent, meeting-by-meeting approach to future decisions. With no commitment to a specific rate path, the ECB balances easing financial conditions while ensuring that inflation settles sustainably at 2 percent. Meanwhile, the APP and PEPP portfolios continue to decline predictably, reinforcing a gradual unwinding of pandemic-era stimulus.

Markets and forecasters uniformly expect 25 basis point cuts in both policy rates.

The European Central Bank (ECB) sets monetary policy for all members of the Eurozone. The highest decision-making body is the Governing Council which comprises the six members of the Executive Board and the 20 presidents of member central banks. Policy meetings take place roughly every six weeks but, due to the sheer number of participants, a rotation system has been introduced so that the total number of votes is capped at twenty-one. The benchmark interest rate is the rate on the main refinancing operations (refi rate) which sits between the marginal lending facility rate and deposit rate. The ECB's primary objective is price stability which since July 2021 is based upon a symmetric 2 percent target for the annual inflation rate.

The European Central Bank determines interest rate policy at their Governing Council meetings. The Council is composed of the six members of the Executive Council and 17 presidents of member central banks (Bank of France, Bundesbank, etc). The Governing Council meets now meets every six weeks. The European Central Bank had an established inflation ceiling of just less than 2 percent which was modified in July 2021 to 2 percent. The ECB's measure of inflation is the harmonized index of consumer prices (HICP). Each member of the Governing Council has one vote and decisions are reached by simple majority. In the event of a tie, the President has the casting vote. Only short-form minutes are released so how individual members voted is not known.

As in the United States, European market participants speculate about the possibility of an interest rate change at these meetings. If the outcome is different from expectations, the impact on European markets can be dramatic and far-reaching. The rate set by the ECB serves as a benchmark for all other interest rates in the Eurozone.

The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the stock market, while lower interest rates are bullish.