The latest quarterly forecast from the European Central Bank shows that overall inflation for 2026 has been revised down to 1.6%, and economic growth next year is also expected to be slightly lower than previously anticipated. Subsequently, traders increased their bets on interest rate cuts, expecting an additional reduction of 33 basis points this year.
After the inflation rate fell below 2% and the economy faced tariff threats, the European Central Bank cut interest rates for the eighth time in a year.
On Thursday, the European Central Bank announced the latest interest rate decision, cutting rates by 25 basis points as expected, bringing the deposit facility rate down from 2.25% to 2%, marking the eighth rate cut in a year.
At the same time, the main refinancing rate was lowered from 2.4% to 2.15%, and the marginal lending rate was reduced from 2.65% to 2.4%, both in line with market expectations.
In addition, the ECB maintained its wording on the future interest rate path, stating its determination to ensure that the inflation rate remains consistently stable at 2%, and the governing council is ready to adjust all tools.
Regarding tariff impacts, the ECB stated that uncertainty in trade policies will affect investment and exports, and that trade escalation will lead to slower economic growth and inflation.
After the announcement of the European Central Bank's interest rate decision, the EUR/USD pair quickly rose and then fell back, trading at 1.1416.
The inflation rate has dropped below 2%, and the economy is facing tariff threats.
This week's data shows that the inflation rate in the Eurozone fell to 1.9% in May, dropping below 2% for the first time in eight months, and the second time since 2021. The slowdown in economic growth is attributed to the deceleration of service price increases and a cooling of wage growth, supporting the view that wage growth will slow after catching up with inflation.
Concerns about the Eurozone economy are increasing, as trade policies may undergo drastic changes without warning, which has suppressed investment and delayed household spending.
Currently, most EU export products are facing a 10% tariff, but if negotiations fail, tariffs could rise to 50% in July. According to CCTV News, the deadline for tariff negotiations between the U.S. and the EU has been extended to July 9.
The European Central Bank indicated that if trade tensions are resolved in a moderate manner, economic growth and inflation to a lesser extent will be above baseline forecasts. However, escalating trade tensions will lead to slower economic growth and inflation.
Additionally, the European Central Bank stated that while wage growth remains high, it is continuously slowing down, and increased income along with a strong job market will drive more spending, although concerns about a tightening financing environment have somewhat eased.
Lowering economic growth and inflation expectations for next year.
The European Central Bank has lowered its economic growth expectations for next year and significantly reduced inflation expectations for this year and next.
Economic growth: The GDP growth rate is expected to be 0.9% in 2025, unchanged from previous estimates. The GDP growth rate is expected to be 1.1% in 2026, down from previous estimates of 1.2%. The GDP growth rate is expected to be 1.3% in 2027, unchanged from previous estimates.
Inflation: The inflation rate is expected to be 2% in 2025, down from previous forecasts of 2.3%. The inflation rate is expected to be 1.6% in 2026, down from previous forecasts of 1.9%. The inflation rate is expected to be 2% in 2027, unchanged from previous forecasts.
The core CPI growth rate is expected to be 2.4% in 2025, up from previous estimates of 2.2%. The core CPI growth rate is expected to be 1.9% in 2026, down from previous estimates of 2.0%. The core CPI growth rate is expected to be 1.9% in 2027, unchanged from previous estimates.
Some analyses indicate that lowering the overall inflation forecast for 2026 to 1.6% could be the biggest surprise tonight and also the most significant change. This will spark discussions about the risks of inflation falling below the 2% target and expectations for further interest rate cuts.
After the interest rates were announced, traders increased their expectations for a rate cut by the European Central Bank, anticipating a further decline of 33 basis points this year. This is equivalent to another cut of 25 basis points, with a one-third probability of another cut. However, the market generally expects the ECB to maintain interest rates in July and to cut rates only in September.
It is worth mentioning that inflation risks still exist. Previous articles pointed out that some European officials are concerned that substantial upcoming expenditures by European governments will cause inflationary pressure.
Editor/melody