Victor Trokoudes (Plum) on ECB decision to cut the deposit rate by 25 basis points

Today’s ECB decision to cut the deposit rate by 25 basis points to 2% was broadly expected. It marks the eighth cut in this cycle and brings the rate to its lowest level since 2022.

While a rate decrease was already highly anticipated, the recent inflation data made it all but certain. Annual Eurozone inflation slowed from 2.2% to 1.9%, undershooting the ECB’s 2% target. Policymakers will have been particularly encouraged by slowing services inflation, which fell unexpectedly to a three-year low of 3.2 percent from 4 percent in the previous month. 

It is to the ECB’s credit that they’ve achieved this reduction, especially when inflation overall had reached 11% in 2022, given some other major central banks are still grappling with this challenge. This, combined with stabilising wage growth, falling energy prices, a strong euro and deteriorating growth outlooks, all pointed towards today’s decision of a rate cut. 

However, there is a lot more uncertainty about what happens next and whether the ECB decides to cut further, given the ongoing U.S–EU trade dispute. It’s entirely understandable that the ECB looks to wait for further clarity but keeps the door open for further reductions. 

The mood music around the negotiations appears more negative with threats of a 50% tariffs, which suggest a bias from the central bank towards easing, although the recent call between von der Leyen and Trump provided some cause for optimism that a deal might yet be agreed. And there is a danger of a disinflation shock if manufacturers are able to dump their goods in the Eurozone to avoid higher trading costs with the U.S., when combined with lower growth and falling energy prices. However, if negotiations break down and tariffs are implemented, supply chain disruptions could reignite inflationary pressures. So a return to the ECB’s ‘wait and see’ approach makes sense. 

For consumers, today’s announcement is positive news potentially when it comes to their mortgages, depending on the type of deal they have. However, for savers, the gap between deposit rates and inflation is now almost non-existent, making real returns from savings far more challenging. So people will need to reconsider how they can best make their money work hard for them, which may now need to include some degree of investing to achieve inflation-beating returns.