European Central Bank Cuts Rates for Seventh Time in a Row... "Trade War Uncertainty"

Deposit Rate Lowered by 0.25 Percentage Points to 2.00% Per Annum

The European Central Bank (ECB) lowered its policy rates by 0.25 percentage points on June 5 (local time).

On this day, the ECB held a monetary policy meeting in Frankfurt, Germany, and announced that it had lowered the deposit rate from 2.25% to 2.00% per annum and the main refinancing rate from 2.40% to 2.15% per annum. The marginal lending rate was also reduced from 2.65% to 2.40% per annum.

As a result, the gap between the ECB's deposit rate, which serves as its monetary policy benchmark, and the US Federal Reserve (Fed) policy rate (4.25?4.50%) has widened to 2.25?2.50 percentage points. The difference from the Bank of Korea's base rate of 2.50% is 0.50 percentage points.

Since September of last year, the ECB has lowered policy rates at all seven meetings. The deposit rate, which stood at 4.00% when the ECB shifted to an accommodative monetary policy stance in June of last year, has been cut by a total of 2.00 percentage points over eight reductions in the span of a year, reaching 2.00%.

At its meeting in March, the ECB indicated the possibility of moderating the pace of policy easing, stating that "monetary policy is becoming significantly less restrictive." However, after the eurozone (the 20 countries using the euro) reported a consumer price inflation rate of 1.9% year-on-year for May?below the medium-term target of 2.0%?the market anticipated a rate cut at today's meeting.

In addition to price stability, concerns over slowing growth due to trade tensions with the United States also provided grounds for further rate cuts. The ECB revised its forecast for eurozone consumer price inflation this year from 2.3% to 2.0%, and for next year from 1.9% to 1.6%. The economic growth forecast for this year was maintained at 0.9%, while the projection for next year was lowered from 1.2% to 1.1%.

The ECB stated that its inflation outlook reflected the impact of falling energy prices and a stronger euro. Regarding economic growth, the ECB explained, "Uncertainty over trade policy is expected to weigh on corporate investment and exports in the short term. In the medium term, increased government investment in defense and infrastructure is expected to support growth."

With this rate cut, the eurozone deposit rate has now entered the middle of the neutral rate range of 1.75?2.25% estimated by the ECB. The neutral rate refers to a level that neither stimulates nor slows economic growth.

Market participants expect the ECB to keep rates on hold at next month's meeting, and to cut rates once more in the second half of the year if tariff negotiations between the United States and the European Union (EU) are concluded. Some ECB officials have recently suggested that the current rate-cutting cycle is nearing its end.

Bloomberg News reported, "The outcome of the tariff negotiations will play a decisive role in the eurozone's economic outlook," and pointed out that large-scale government investment in defense and infrastructure by European countries is also a factor increasing uncertainty.