The European Central Bank (ECB) cut its deposit rate by a quarter basis point to 2 percent yesterday, along with its 2026 inflation forecast to 1.6 percent. ECB President Christine Lagarde indicated at a news conference that the eurozone economy was unlikely to accelerate, but the tone was slightly less pessimistic than a month earlier.
The rate cut was a “nearly unanimous” decision, with only Austria’s Robert Holzmann opposing it. Ahead of the meeting, he had called for a break in June and July, as well as to “maintain calm” amid ongoing EU-U.S. trade tensions.
The cut was in line with expectations. Goldman Sachs Asset Management expects the deposit rate to potentially reach 1.5 percent this year, while noting that “trade uncertainty continues to pose risk to euro area economic growth and underlying disinflation is likely to remain persistent.
Lagarde noted that risks to growth were still tilted to the downside, still a reversal from her recent assessment that “downside risks have increased.”
She emphasized the issue of wages, according to Polska Business Insider, pointing to further easing of wage pressures in the future. She also emphasized that inflation is expected to return to 2 percent in 2027, even after falling well below target next year.
“The inflation outlook is more uncertain than usual,” Lagarde said.
Possible sources of downward pressure include falling energy costs and a strengthening euro. This could intensify if higher U.S. tariffs lead to lower demand for exports and other countries redirect their goods to the eurozone.
On the other hand, fragmentation of global supply chains could raise inflation, as could increases in defense and infrastructure spending, she said.
Deutsche Bank singled out higher defense spending as a big positive for 2026, in terms of strategic autonomy and “EU exceptionalism,” according to ForexLive. It also expects the ECB to resume rate hikes by the end of next year.
On GDP growth, Lagarde said a boost in demand to circumvent U.S. tariffs likely boosted output in the first quarter, adding she wouldn’t be surprised to see further improvement.
Lagarde reiterated that the ECB was in a “good position” to face uncertainties after today’s cut, but signaled that this did not necessarily mean the ECB was finished cutting rates. Nor does it mean they can declare victory over inflation.
“Wins are always nice, but there’s always another battle. I think we’re approaching the end of a monetary policy cycle that has responded to complex shocks, including COVID, including the war in Ukraine, the illegal war in Ukraine, and the energy crisis,” she said.
The ECB head also called the euro’s strength probably the biggest surprise for policymakers right now, as they had expected it to lose value after Trump’s trade tariffs. Lagarde noted that its strength could be due to Trump’s unpredictable policies and the uncertainty they have generated.
Nevertheless, Lagarde stressed that “the ECB must remain vigilant, even if it does not target the exchange rate.”
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