The European Central Bank appears poised to trim interest rates once again, as it grapples with a dual challenge: persistently soft inflation and escalating trade tensions with the United States. With a policy decision due Thursday, markets are widely anticipating a 25 basis point reduction, signaling a continuation of the central bank’s easing cycle.

If confirmed, this move would bring the deposit rate to 2.00% and the main refinancing rate to 2.15%, marking the eighth rate cut in the current cycle. The ECB last lowered rates in April, and since then, inflationary pressures have continued to ease, slipping to 1.9% in May — just below the bank’s long-standing 2% target.

Inflation Falls, Growth Wobbles

This latest drop in inflation adds further weight to the argument for more accommodative monetary policy. But it’s not just price stability driving the conversation. The broader Eurozone economy remains under strain, burdened by new and looming tariffs from the United States.

US President Donald Trump has ramped up trade hostilities by imposing a sudden doubling of tariffs on steel and aluminum, now set at 50%. He’s also threatened to hit all EU exports with similarly aggressive levies unless trade negotiations progress — a move that has already disrupted transatlantic business sentiment. Uncertainty surrounding the US’s ultimate demands continues to cloud the outlook for European exporters, particularly automakers, who are warning of potential production shutdowns due to raw material shortages triggered by retaliatory Chinese measures.

Europe’s dependence on global trade makes it especially vulnerable to this spiraling conflict. The resulting uncertainty is beginning to erode growth expectations across the continent, even as the first quarter showed surprising resilience — a performance that some analysts attribute to US companies stockpiling ahead of expected tariffs.

A Cut With Caveats

Though a rate cut appears all but guaranteed, the tone accompanying the decision is likely to be carefully calibrated. Policymakers may deliver a dovish policy move but balance it with hawkish rhetoric, signaling a possible pause in July.

This measured approach would acknowledge the short-term need to stimulate the economy without suggesting that a prolonged easing cycle is inevitable. Still, many economists believe further rate reductions may be required, especially if inflation remains subdued and the Euro strengthens.

Forecast updates are also expected, with downward revisions to both GDP and inflation for 2025 and 2026 likely. Current projections suggest Eurozone growth won’t exceed 1% annually through 2026 — a bleak outlook compounded by external pressures and weak domestic demand.

Sub-Neutral Rates on the Horizon?

Discussion is already shifting toward whether the ECB will need to push rates below the so-called neutral level — the rate at which monetary policy is neither stimulating nor restraining the economy. While estimates of the neutral rate vary, many place it between 1.75% and 2.25% for the deposit rate. If the ECB cuts again later this year, as some predict, rates could dip into sub-neutral territory. One forecast suggests a deposit rate of 1.50% by December.

This would reflect a more aggressive effort to counteract disinflation and weak growth, and could signal that the ECB sees more structural fragility in the Eurozone economy than previously acknowledged.

Spotlight on Lagarde

Beyond monetary policy, the press conference following the decision is expected to draw heightened attention for another reason: ECB President Christine Lagarde herself. Recent speculation about her potential early departure to lead the World Economic Forum has stirred interest, despite denials from both the ECB and Lagarde. Her term officially runs through 2027, but the rumor mill remains active.

Whether she addresses these rumors directly or not, Lagarde’s performance and message will be scrutinized closely, both for signs of internal ECB dynamics and for clues about how committed the institution remains to its forward guidance.

As the ECB prepares to unveil its next policy step, it does so in the shadow of global uncertainty, with its traditional policy levers under increasing strain. Rate cuts may still offer short-term relief, but the bigger question looms: how much more can monetary policy do when geopolitics and supply shocks dominate the landscape?