As expected, the European Central Bank cut its main policy rates by 25 basis points, indicating that it's satisfied with the current level of inflation which is around the ECB's 2.0 percent intermediate term target.

It lowered its forecasts for inflation forecasts by 0.3 percentage points for this year and next to 2.0 and 1.6 percent, respectively. With current heightened uncertainty, the ECB will continue to be data-dependent in its assessments and review its policy stance on a meeting-by-meeting basis.

The ECB touched on current trade tensions, saying that should they continue in the coming months growth and inflation would be below baseline expectations. Given the current posture of the US administration, it's unlikely those will abate in the near term. Germany's new Chancellor Friedrich Merz is headed to the US for talks with Donald Trump which may give some insight into how tariff policy might proceed.

Should there be a"benign" resolution, the ECB stated expects growth and inflation will be higher than the baseline.

ECB President Christine Lagarde told reporters after the announcement that the rate decision was nearly unanimous with only one dissenting vote.

After another batch of low inflation readings around the Eurozone send a message of continued disinflation, forecasters see the ECB on track for another 25 bp cut.

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.