How much could the ECB cut interest rates in 2025?

The European Central Bank, ECB, is back in the spotlight of so-called ‘monetary easing’, with markets and economists speculating about how far the Frankfurt am Main, Germany-based institution could go in its interest rate cut in 2025.

After reducing the interest rate on its deposit facility to 3% in 2024, a drop of one percentage point, economic and inflationary trends suggest that further reductions are coming in the coming times.

Could rates fall below the well-known ‘neutral’ level of 2%? What factors could drive such a movement?

The path towards the ECB’s neutral rate

The ECB’s path to relaxation has been driven by falling inflation and unmeritorious growth.

Annual inflation in the euro zone went from 2.8% in January 2024 to 2.2% in November of this same year, and economic growth slowed to an annualized rate of 0.4% in the third quarter, approaching stagnation.

“After a long period of restrictive policy, our confidence that we are seeing a timely return to the 2% target has increased,” said ECB President Christine Lagarde in a recent speech in Vilnius.

In its December monetary policy statement, the ECB notably abandoned its commitment to maintain rates “sufficiently restrictive as long as necessary“, signaling a clear change towards a more accommodating posture.

“This bias no longer reflects the evolution of the macroeconomic panorama, our inflation outlook or the balance of risks around it“Lagarde declared.

The latest macroeconomic projections show slight downward adjustments to inflation forecasts, thus headline inflation is expected to reach 2.1% and core inflation 2.3%before both align at 1.9% in 2026. Growth forecasts have also been revised downwards, with a forecast of 1.1% for 2025, up from 1.3% in September, and from 1.4% by 2026, compared to 1.5% previously.

The ECB seems willing to adjust your interest rate of the deposit facility to a so-called ‘neutral’ level, a point widely considered to maintain economic balance without stimulating or slowing growth.

The money markets already they discount one percentage point of rate cuts by the ECB in 2025, which would place the deposit facility rate at 2%, its lowest level since January 2023.

“The ECB continues to prefer a gradual approach to its monetary easing. We expect 25 basis point rate cuts at each upcoming monetary policy meetinguntil the deposit facility rate stabilizes at 2% in June 2025,” Guillaume Derrien, an economist at BNP Paribas, recently noted.

The European Central Bank is not the ‘wild card of everything’

The argument for the ECB to consider the 2% neutral rate as the likely endpoint of its cutting cycle stems from the reality that monetary policy alone cannot always shoulder the burden to face the economic challenges of the eurozone. Fiscal policy must also play its role.

Katharine Neiss, PGIM Fixed Income’s chief European economist, said the ECB’s December meeting indicated it may be nearing the end, rather than the middle, of its easing cycle. “For our part, We maintain our forecast of 100 basis points of additional cuts of official interest rates in 2025, which would take the deposit rate to 2.0%”.

ECB President Christine Lagarde reinforced this balanced approach, stating that monetary policy decisions They remain flexible and are not fixed on a predetermined path.

Lagarde also stressed that the important economic challenges of the region cannot be resolved through monetary policy aloneemphasizing that the ECB “cannot serve as a wild card” for the European economy.

Veteran Wall Street analyst Ed Yardeni, president of Yardeni Research, echoed this view, urging the European Union to act decisively on governance reforms and economic growth. Thus, he pointed out the recommendations of the former head of the ECB, Mario Draghi, and the former Italian Prime Minister Enrico Letta, as critical steps to ensure future resilience of the community block.

Could the ECB lower rates below 2% in the face of Trump’s tariffs and the risk of further cuts?

President-elect Donald Trump’s promise to impose a 60% tariff on Chinese imports and a universal 10% tariff on all other countries, looms over the eurozone. Europe’s largest exporting industries, from machinery to pharmaceuticals, face significant risks from reduced global trade volumes.

Rubén Segura Cayuela, chief economist at Bank of America, considers that the change in position of the ECB, which has gone from a ‘hawk’ position to a ‘dove’ positionis a sign that more substantial cuts could be coming.

“We expect consecutive ECB cuts to a 1.5% deposit rate in September,” he said, adding that this forecast assumes data deterioration and risk escalation arising from global trade tensions.

“The risks of a faster cut cycle are significant, given the renewed uncertainty about trade policy and the consequences of tariffs.

Goldman Sachs economist Sven Jari Stehn also highlighted the possibility of faster pace of cutsdepending on the economic perspectives.

“Given our forecast for moderate growth and a gradual decline in core inflation towards 2%, we foresee a cut of 25 basis points in January, with a potential of 50 basis points in March.

Goldman Sachs foresees sequential cuts until the deposit rate is at 1.75% by mid-2025, although Stehn points out the risk of “faster, deeper cuts“if conditions worsen.

Bill Diviney, head of macroeconomic studies at ABN Amro, predicts that losTrade tariffs could lead to a disinflationary shock for the eurozone and place inflation below the 2% target set by the ECB.

“We expect the ECB to cut rates by 25 basis points at each Governing Council meeting next year. with the exception of a break in April. Finally, we anticipate that the ECB will lower its deposit rate to 1%,” he points out.