Date: 30th May 2025.


ECB Rate Cut Expectations: Will June Deliver Another 25 bp Cut?



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The European Central Bank (ECB) is widely expected to announce another 25 basis point (bp) interest rate cut at its upcoming June policy meeting. Despite dovish expectations, recent statements from hawkish members and rising geopolitical uncertainties suggest that the path toward additional monetary policy easing may not be as straightforward as before.


Mixed Signals: Schnabel’s Call for Caution vs Dovish Momentum


While Executive Board member Isabel Schnabel voiced support for keeping rates unchanged, noting that now is the time for a ‘steady hand,’ the overall tone within the ECB Governing Council has recently leaned dovish. Preliminary Eurozone inflation data and updated projections could strengthen the case made by members like François Villeroy de Galhau for another cut.


June Outlook: Pause vs 25 bp Cut


At the last meeting, the ECB delivered a widely anticipated 25 bp cut. However, the April meeting minutes revealed a split into three camps:


* One group initially preferred to pause but agreed to front-load a June cut due to rising trade tensions from Trump’s ‘Liberation Day’ tariff threats.
* Another faction argued for a larger 50 bp cut, indicating deeper concern over growth risks.
* A third group favoured more cautious, data-dependent easing.


Heading into the June ECB decision, the debate has narrowed to two options:


* A pause to assess incoming data
* A 25 bp rate cut to sustain momentum


Schnabel and Austrian central bank chief Robert Holzmann have spoken in favour of pausing, arguing that further cuts may be ineffective or even risky for the Eurozone economy.


Data & Tariff Tensions: A New Source of Risk


Since Schnabel’s remarks, Trump has escalated threats of a 50 bp tariff on EU imports. Though temporarily suspended for talks, the uncertainty weighs on sentiment. Unlike the market volatility after the ‘Liberation Day’ headlines, current reactions have been more subdued, making a preemptive rate cut less justifiable.


Even ECB Chief Economist Philip Lane, typically dovish, warned against both over-tightening and over-easing. He emphasized the need for data-driven decisions, saying that further cuts are possible if inflation softens, but ‘no one is talking about dramatic rate cuts.’


Preliminary May inflation data, especially in services, is expected to show deceleration—but this may reflect seasonal adjustments. Meanwhile, import prices continue to fall, though disinflation from a stronger euro (EUR) may have peaked.


Trump’s recent trade threats dampen hopes for a negotiated deal. EU retaliation, if pursued, could raise imported goods prices and offset currency-related disinflation, adding complexity to the ECB’s policy decisions.


The ECB’s inflation expectations survey showed a rise in 1-year inflation expectations, though long-term views remain stable. Business confidence data has been mixed, with front-loaded exports earlier this year potentially leading to weaker activity in Q2.


Germany’s new Chancellor's investment push in infrastructure and defence—what Holzmann called a ‘fiscal shock’—could provide economic support in the medium term. While such measures take time to impact GDP, they add another layer to the ECB’s policy calculus.


Is the ECB Running Out of Room to Cut?


With rising internal opposition and geopolitical headwinds, the ECB's path to additional interest rate cuts appears increasingly narrow. If a cut is delivered next week, the central bank may pause in July unless further economic shocks emerge. Alternatively, a June pause could leave the door open for easing in July. As Lane stated, the ECB must remain flexible, but the hurdles to further rate cuts are clearly rising.


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Please note that times displayed based on local time zone and are from time of writing this report.


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Andria Pichidi
HFMarkets


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