In April 2025, the ECB cut its three key interest rates by 25 basis points, lowering the deposit facility rate to 2.25 percent, the main refinancing operations to 2.40 percent, and the marginal lending facility to 2.65 percent. This move reflects growing confidence in the euro area's disinflation trajectory, as both headline and core inflationespecially in serviceshave eased. Underlying inflation appears aligned with the ECB's 2 percent medium-term target, aided by moderating wage growth and resilient profit margins that help absorb remaining cost pressures.

Despite inflation progress, the ECB faces new headwinds. Rising global trade tensions weaken growth prospects and fuel uncertainty, dampening consumer and business confidence. This and volatile market reactions could tighten financing conditions across the zone. Against this backdrop, the ECB is adopting a cautious, data-dependent stance, making interest rate decisions on a meeting-by-meeting basis.

Additionally, the ECB continues to scale back its Asset Purchase Programme and Pandemic Emergency Purchase Programme, reinforcing its shift away from crisis-era stimulus. Still, it remains committed to flexibility, with instruments like the Transmission Protection Instrument ready to safeguard monetary transmission and uphold price stability. This approach underscores the ECB's commitment to stabilising inflation.

Forecasters agree the ECB will cut rates by 25 basis points and will cut again in June and October even with the tentative tariff pause. Lots of focus on the guidance and how the ECB views the range of problems flowing from the trade sector.

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.