The European Central Bank signaled it may be near the end of its rate-cutting cycle despite the euro's dramatic surge this year, as policymakers express confidence that inflation risks remain contained even as the currency's strength poses new challenges for the eurozone economy.
ECB President Christine Lagarde said the central bank believes it is "in a good position to navigate the uncertain conditions" after cutting rates by 25 basis points to 2.00% on June 5, suggesting limited scope for further easing despite mounting external pressures. The dovish stance comes as the euro has appreciated nearly 10% against the dollar since January, reaching levels not seen since April.
The ECB's latest reduction brought its deposit rate to 2.00%, marking what Lagarde described as approaching "the end of the monetary policy easing cycle"1. Only one Governing Council member, known hawk Robert Holzmann, dissented from the decision2.
The central bank revised its inflation forecasts lower, projecting 2.0% for 2025 and 1.6% for 2026, down 0.3 percentage points from March estimates3. May inflation came in at 1.9%, below the ECB's 2% target4. "The downward revisions mainly reflect lower assumptions for energy prices and a stronger euro," Lagarde said5.
The currency's appreciation stems partly from the delay of U.S. tariffs on EU goods until July 9 and declining confidence in dollar-denominated assets amid trade policy uncertainty1. The euro's trade-weighted index reached 108.3 in March, according to the Bank for International Settlements2.
While the stronger euro helps contain inflation by making imports cheaper, it threatens export competitiveness in key eurozone economies. Germany, France, and Italy, which together account for 52.6% of EU GDP, face particular pressure on their export-driven sectors2.
The ECB maintained its growth projections at 0.9% for 2025, 1.1% for 2026, and 1.3% for 2027, despite a stronger-than-expected first quarter offset by weaker prospects ahead1. "Uncertainty surrounding trade policies is expected to weigh on business investment and exports, especially in the short term," the central bank said2.
Most analysts expect another 25 basis point cut later this year despite Lagarde's cautious tone. David Zahn of Franklin Templeton said the ECB "will continue their rate cutting cycle to below 2 per cent by mid-2025" to address weak growth and below-target inflation3.
The central bank faces a delicate balancing act as it weighs the disinflationary effects of euro strength against the need to support an economy still grappling with trade uncertainty and sluggish manufacturing output.
