European Central Bank (ECB) Assessment in June

■ The ECB announced a 0.25% rate cut as expected, and President Lagarde hinted that the rate cut cycle may be suspended.    

■ Although the staff's downward adjustment to the economic and inflation outlook was small, the economic risks brought by tariffs tended to the downside.   
 
   At the Council meeting on the 5th, the European Central Bank (ECB) decided to cut the main policy interest rate by 0.25%, aligning roughly with market expectations. This marks the seventh consecutive meeting in which interest rates have been lowered. Consequently, the deposit rate of the Bank of China decreased to 2.00%, precisely the midpoint of the neutral interest rate range (1.75%-2.25%) estimated by ECB staff. Since interest rate cuts commenced in June 2024, the cumulative reduction in the policy rate has reached 2.00%.   
 
   At the press conference with ECB President Lagarde, indications of a potential suspension of the rate cut cycle began to surface. Although the ECB maintains the stance of "judging from meeting to meeting and not over-presetting the path," the president stated at the conference: "The monetary policy cycle adopted to respond to the compound shocks of the new crown epidemic, the war in Ukraine, and the energy crisis is coming to an end." She believes that the current interest rate level is in the "right place" considering future uncertainties. Since the consumer price index (HICP) rose by 1.9% year-on-year in May and returned to the price target, these comments suggest that the interest rate cut at this meeting may indicate a phased end, and the impact of tariffs will enter a period of observation going forward. Before the next Council meeting on July 23 and 24, several key events will occur, including the NATO summit (June 24-25), the end of the tariff suspension period (July 9), and the release of June HICP data (July 17). The ECB will make policy decisions after fully analyzing this information.   
 
   In this updated macroeconomic forecast by staff, although the growth rate and inflation outlook have been lowered, the revisions are smaller than those made in March. The forecast is based on the premise that "the United States will impose a 10% tariff on the European Union," and its impact seems limited at present. The real GDP growth rate is expected to be 0.9% in 2025, 1.1% in 2026, and 1.3% in 2027, with a return to the 1% range anticipated from next year. The forecast for 2025 remains unchanged because current stability and future weakness offset each other; for 2026, "the uncertainty of trade frictions will drag down corporate investment and exports," but the "expansion of defense and infrastructure investment" provides support, resulting in a final reduction of only 0.1 percentage point. Regarding inflation forecasts, the expected rates for 2025, 2026, and 2027 are 2.0%, 1.6%, and 2.0%, respectively. Reflecting the decline in energy prices and the appreciation of the euro, the forecasts for 2025 and 2026 have each been reduced by 0.3 percentage points; however, overall, it is still expected to return to the 2% inflation target by the end of the forecast period. Nevertheless, President Lagarde also noted that "economic risks are still biased to the downside" and "the uncertainty of the inflation outlook is higher than normal." If the direction of US tariff policy has a greater and lasting impact on the economy, the ECB may implement additional easing measures.