The ECB continues its monetary easing policy and lowers its main interest rate

This is the eighth rate cut for the European Central Bank in a year. The Frankfurt-based monetary institution, headed by Frenchwoman Christine Lagarde, announced a further downward revision of its main rate, the rate on bank deposits, from 2.25% to 2% on Thursday, June 5. The reduction was "based on its updated assessment of the inflation outlook."

Anticipated by markets and economists, this rate cut comes two days after strong inflation figures for May in the eurozone. On Tuesday, Eurostat measured price increases at 1.9% over one year, its lowest level since September 2024. This is just below the ECB's medium-term target of 2%. This Thursday, the central bank revised downward its inflation forecasts for 2025 (2% instead of 2.3%) and 2026 (1.6% versus 1.9%). These projections are explained by the decline in energy prices and the appreciation of the euro.

"Inflation and the European economy are slowing down, which gives the ECB two good reasons to lower rates," analyzes François Geerolf, an economist at the French Economic Observatory (OFCE). By lowering "the price of money," the European Central Bank hopes to boost the credit that traditional banks grant to businesses and households to stimulate growth and reduce unemployment.

Does this mean that the European Central Bank will now hold off on rate cuts? Possibly. During her press conference this Thursday, Christine Lagarde stated that "at current interest rates," the institution has reached "the end of a monetary policy cycle."

However, there is still debate about the real effects of such maneuvers on the economy. For François Geerolf, "we should not overestimate the effects of monetary policy" because "state budgetary policy has a much greater impact." In this regard, the economist is not convinced that the decline in inflation should be attributed to the ECB's interest rate policy, but rather to the decline in energy prices. He calls for attention to the upcoming budgetary signals coming from Germany, with its moribund economy, and those from France, whose spending reduction targets are clearly stated by the government.

On the other hand, for François Geerolf, the ECB's about-turn should have "direct positive effects on real estate loans and the construction sector," which were hit hard by the sharp rise in key interest rates between July 2022 (0.5%) and September 2023 (4.5%). In this regard, he believes that the ECB at the time "increased the difficulties of the European economy [through these increases], at a time when the continent was going through an industrial crisis and an energy crisis."

This brutal sequence of rate hikes also had a significant impact on the public finances of member countries. This sudden change in policy weighed on the finances of the Central Bank, which stopped paying dividends to shareholder states. The shortfall amounts to an average of €4 billion per year for the French government . And more indirectly, the rise in rates has significantly pushed up the interest rates paid by governments on their public debt.

At the same time, the ECB is pursuing another policy, called "quantitative tightening," which partially cancels out the easing effect of its rates. This process takes the form of a drastic reduction in the volume of loans granted and bonds held by the institution. As Piero Cipollone, a member of the Executive Board of the European Central Bank, pointed out last February , "for the first time in the history of the ECB," the institution has "two monetary policy tools working in opposite directions." This is because quantitative tightening has the effect of drying up available liquidity on the market and pushing up the cost of money—the interest rate—the opposite of the effects of lowering the key rate.

Updated at 4:10 p.m. with a statement from Christine Lagarde.