The ECB is expected to cut rates further in 2025 as weak growth and cooling inflation persist. While markets predict a drop to 2%, some analysts suggest deeper cuts could follow if trade risks and global uncertainties escalate.
The European Central Bank (ECB) is back in the monetary easing spotlight, with markets and economists speculating just how far Frankfurt might go in cutting interest rates in 2025.
After reducing its key deposit facility rate to 3% in 2024—a full percentage point drop—economic and inflationary trends suggest further reductions may be on the horizon.
Could rates drop below the 2% “neutral” level, and what factors could drive such a move?
The road to ECB neutral rate
The ECB’s pivot toward easing has been driven by falling inflation and lacklustre growth.
Eurozone annual inflation eased from 2.8% in January 2024 to 2.2% by November, and economic growth slowed to an annualised rate of 0.4% in the third quarter, nearing stagnation.
“After a lengthy period of restrictive policy, our confidence that we are seeing a timely return to [2%] target has increased,” ECB President Christine Lagarde, said in a recent speech in Vilnius.
In its December monetary policy statement, the ECB notably dropped its commitment to keeping rates “sufficiently restrictive for as long as necessary,” signalling a clear shift toward a more accommodative stance.
“This bias no longer reflects the evolving macroeconomic landscape, our outlook for inflation or the balance of risks around it,” ECB’s Lagarde said.
The latest macroeconomic projections show slight downward adjustments to inflation forecasts, with headline inflation expected to reach 2.1% and core inflation 2.3% before both align at 1.9% by 2026. Growth forecasts have also been revised lower, with 2025 now projected at 1.1% – down from 1.3% in September – and 2026 at 1.4% – down from previously 1.5%.
The ECB seems poised to adjust its deposit facility rate to a so-called “neutral” level, a point widely regarded as maintaining economic balance without stimulating or restraining growth.
Money markets are already pricing in a full percentage point of rate cuts by the ECB in 2025, which would bring the deposit facility rate to 2%—its lowest level since January 2023.
“The ECB continues to prefer a gradual approach to its monetary easing. We expect rate cuts of 25 basis points at each upcoming monetary policy meeting until the deposit facility rate stabilises at 2.0% in June 2025,” Guillaume Derrien, economist at BNP Paribas, recently noted.
The ECB is not the “Jack of all trades”
The argument for the ECB viewing the neutral rate of 2% as the likely endpoint of its cutting cycle stems from the reality that monetary policy alone cannot always shoulder the burden of addressing the eurozone’s economic challenges. Fiscal policy, too, must play its part.
Katharine Neiss, PhD, chief European economist at PGIM Fixed Income, noted that the ECB’s December meeting signalled it might be nearing the end—rather than the middle—of its easing cycle. “For our part, we’re maintaining our forecast for 100 bps of additional policy rate cuts in 2025, which would take the deposit rate to 2.0%.”
ECB President Christine Lagarde reinforced this balanced approach, stating that monetary policy decisions remain flexible and not set on a pre-determined path.
She also stressed that the region’s significant economic challenges cannot be solved by monetary policy alone, emphasising that the ECB “cannot serve as a jack of all trades” for the European economy.
Veteran Wall Street analyst Ed Yardeni, president of Yardeni Research, echoed this view, calling on the European Union to act decisively on governance and economic growth reforms. He pointed to recommendations from former ECB head Mario Draghi and former Italian Prime Minister Enrico Letta as critical steps to ensure the bloc’s future resilience.
Trump tariffs and the risk of deeper cuts: Could the ECB lower rates below 2%?
President-elect Donald Trump’s pledge to impose a 60% tariff on Chinese imports and a universal 10% tariff on all other countries looms large for the eurozone. European export-heavy industries, from machinery to pharmaceuticals, face significant risks from reduced global trade volumes.
Bank of America’s economist Ruben Segura Cayuela sees the ECB’s shift from a hawkish to a dovish stance as a signal that more substantial cuts could be on the horizon.
“We expect back-to-back cuts from the ECB to a 1.5% deposit rate by September,” he said, adding that this forecast assumes deteriorating data and escalating risks from global trade tensions.
“The risks of a faster cutting cycle are important given renewed uncertainty on trade policy and the fallout from tariffs.”
Goldman Sachs economist Sven Jari Stehn also highlighted the potential for a quicker pace of cuts depending on the economic outlook.
“Given our forecast for subdued growth and a gradual decline in core inflation toward 2%, we predict a 25 basis-point cut in January, with a potential for 50 basis points in March.”
Goldman Sachs anticipates sequential cuts to bring the deposit rate to 1.75% by mid-2025, though Stehn noted the risk of “faster and deeper cuts” if conditions worsen.
Bill Diviney, head of macro research at ABN Amro, forecasts that trade tariffs could be a disinflationary shock to the eurozone, further pulling inflation below the ECB’s 2% target.
“We expect the ECB to cut rates by 25bp at each Governing Council meeting into next year, with the exception of a pause in April. Eventually, we see the ECB taking its deposit rate all the way down to 1%.”
