KPMG comments on today’s European Central Bank decision

“Today’s decision to cut interest rates was underscored by the growing risk of inflation undershooting its target in the medium term. This risk was reflected in the updated projections, which saw the ECB lower its inflation forecast for both 2025 and 2026.

“Although growth projections were broadly unchanged, the outlook for the economy is more uncertain and could be subject to a significant downward revision in September. Much of this depends on the outcome of the trade negotiations with the US, which the ECB highlighted in its scenario analysis.

"The ECB once again stressed its data dependent approach to lowering interest rates, remaining tight lipped regarding the path forward. The decision to retain flexibility is warranted given the uncertain economic backdrop. Nonetheless, we expect the pace of the easing cycle to slow in the second half of the year, as rates approach the lower end of the ECB’s neutral estimate range.

"Looking ahead, we expect the ECB to hold rates steady at the July meeting next month. The summer months will allow them to assess the potential conclusion of trade negotiations, in addition to monitoring developments on fiscal policy across the Eurozone. The second half of the year could see up to two more rate cuts. If the growth outlook deteriorates, we expect the Governing Council to move rates into accommodative territory, potentially falling to 1.5% by the end of the year.”