The European Central Bank (ECB) cut the three key interest rates in the Eurozone last week, attempting to stabilize market expectations through loose monetary policy while reserving room for policy adjustments. This move is aimed at addressing the current weak economic situation in the Eurozone. However, the European economy still faces structural challenges, and the subsequent trend will depend on the complex interplay of internal and external factors.
Recent ECB Actions
The ECB held a regular monetary policy meeting and decided to cut the deposit facility rate, the main refinancing rate, and the marginal lending rate in the Eurozone by 25 basis points each, to 2.00%, 2.15%, and 2.40%, respectively. The ECB stated that the inflation rate in the Eurozone is currently near the medium-term target of 2%.
Economic Context
This interest rate cut comes at a time when the growth momentum of the Eurozone economy continues to weaken. Although the GDP growth rate in the first quarter of 2025 slightly exceeded expectations, the full-year growth forecast has still been revised down to 0.9%, and core economies such as Germany may even remain stagnant for three consecutive years. Some analyses point out that the economic weakness of the Eurozone is not only due to insufficient internal demand but also constrained by the deterioration of the external trade environment. The United States recently raised the tariff on steel and aluminum products from 25% to 50%. Although the European Union plans to retaliate, the escalation of trade frictions has significantly dampened business investment and export confidence. However, the strengthening of the euro and the decline in energy prices further depressed the inflation level. The inflation rate in the Eurozone dropped to 1.9% in May, falling below the 2% target level for the first time in eight months. This opened up room for the ECB to cut interest rates and inject liquidity support into economic growth.
Short-Term Impact
In the short term, the ECB’s interest rate cut will help boost consumption and investment by reducing financing costs, especially in line with the fiscal stimulus plans promoted by major Eurozone countries, such as the 46-billion-euro corporate tax relief plan proposed by Germany, thereby stabilizing the economic fundamentals amid trade conflicts.
Long-Term Implications
In the long term, this interest rate cut reflects a phased shift in the ECB’s monetary policy from “controlling inflation” to “stabilizing growth.” However, the ECB did not clarify the subsequent policy path but emphasized the flexibility of “data dependence.” ECB President Christine Lagarde said that the current monetary policy cycle has entered a new stage, but the future trend of interest rates will depend on the performance of economic data. The ECB will respond flexibly to changes in the situation, continue to firmly achieve its price stability goal, and will not set a policy path in advance. Some analyses suggest that the cautious attitude of the ECB is aimed at reserving policy space to deal with potential shocks and avoiding premature depletion of its tool reserves.
Differential Impact on the European Economy
The impact of interest rate cuts on the European economy shows a differentiated trend. Driven by the continuous interest rate cuts by the ECB, European stock markets have performed well recently. The German DAX index has risen by 22% this year, and the Stoxx50 index has increased by 10.6%, reflecting the reallocation of funds to European assets in a low-interest-rate environment. However, the Eurozone economy still faces severe challenges. Not only is the growth of manufacturing and services sluggish, but also the coordination issue between the monetary policy of the ECB and the fiscal policies of Eurozone countries is rather prominent.
Although expansionary fiscal plans in countries such as Germany are conducive to growth, they may also push up debt levels, potentially conflicting with the ECB’s goal of maintaining financial stability. Furthermore, the policy divergence with the Federal Reserve (with an interest rate spread exceeding 2 percentage points) has exacerbated the fluctuations in the euro exchange rate. If the pressure of capital outflow rises, it may weaken the actual effect of the interest rate cut.
Future Considerations
In the coming period, managers of the European economy need to find a balance among multiple uncertainties and pay close attention to some important factors. The first is the progress of the trade war. If the trade dispute between the United States and Europe escalates, the growth of the Eurozone may further slow down, and even force the ECB to intensify easing. Conversely, if the negotiations make progress, it will help restore the confidence of enterprises rapidly. The second is the divergence in inflation paths. The current low inflation provides support for interest rate cuts, but a rebound in energy prices or a rise in wages could quickly change this situation, when the ECB will face pressure to shift its policy. The third is the advancement of structural reform. Lagarde has repeatedly called for deepening reforms such as the Capital Market Union and the digital euro to enhance the international status of the euro and economic resilience. However, these long-term agendas require political consensus support and are unlikely to yield results in the short term.
Conclusion
The ECB’s interest rate cut this time is somewhat of a “defensive” measure. It is both a response to the current pressure and leaves room for future policy adjustments. However, monetary policy alone cannot solve the growth bottleneck. Without fiscal coordination and the support of structural reforms, the European economy may fall into a cycle of “low growth – low inflation – high debt.” Against the backdrop of sluggish global economic growth and continuous challenges, whether the Eurozone can get out of the growth predicament at an early date truly tests the wisdom of policymakers.
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