The European Central Bank has cut interest rates to 2% in its first move this year, signalling a shift in focus from inflation control to shoring up eurozone growth.

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It’s the ECB’s eighth rate cut in just over a year, bringing the deposit rate down from 2.25% to 2%—the midpoint of what officials describe as a “neutral” range. The move comes as inflation returns to the ECB’s 2% target and concerns grow over weak economic prospects, partly fuelled by fears of a transatlantic trade war.

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The decision, announced on Thursday, keeps the door open for further changes but suggests the pace of cuts may now slow. “Especially in current conditions of exceptional uncertainty, the Governing Council will follow a data-dependent and meeting-by-meeting approach,” the ECB said in its statement.

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Rates on the ECB’s weekly bank auctions were also reduced to 2.15%, while the overnight borrowing rate dropped to 2.40%.

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Inflation Under Control, But Trouble Ahead

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After three years of stubbornly high inflation, even price pressures in the services sector have started to ease, allowing the ECB to act. But with the eurozone economy still struggling to gain momentum, policymakers are walking a tightrope.

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The central bank’s new projections put inflation at 2.0% for 2025, 1.6% in 2026, and back to 2.0% in 2027. Yet behind the headline numbers lies a more cautious tone: the ECB now expects weaker investment and exports, largely due to policy uncertainty in the United States.

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Still, it flagged that increased public investment—particularly in defence and infrastructure—could help offset the drag over the medium term. ‎

Just last week, Lagarde hinted that the euro could be positioned as a global alternative to the dollar—but only if European governments deepen capital markets, improve legal cohesion, and align security with open trade.

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“The euro will not gain influence by default—it will have to earn it,” Lagarde said on 26 May.

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For now, the ECB’s cautious rate cut is a clear signal: the inflation fight may be largely won, but the battle to revive Europe’s economy has just begun.

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