Is This the End of the ECB’s Tightening Cycle? Lagarde Hints Yes—With Caveats

In a widely anticipated move, the European Central Bank (ECB) has reduced its three key interest rates by 25 basis points, with the deposit facility rate now standing at 2%. The decision reflects a cautious yet deliberate effort to navigate persistent global uncertainty while maintaining commitment to price stability.

Policy Stance: data-driven and cautious

The Governing Council’s decision—reached with near unanimity—signals a potential end to the current policy cycle. While no firm path was pre-committed, ECB President Christine Lagarde reiterated that future decisions will follow a “meeting-by-meeting” approach, guided strictly by incoming data. The ECB remains focused on ensuring inflation stabilises around its 2% medium-term target.

Lagarde’s reiteration that the “ECB remains well positioned at the current rate” seemed to give markets confirmation that the bank will likely pause its cutting cycle in July, with current pricing showing a 78% chance of this happening. This helped the euro regain some traction, with EUR/USD briefly pushing past 1.1490 during the press conference.

EUR/USD 5-minute chart

(Past performance is not a reliable indicator of future results)

Economic Landscape: growth resilient but vulnerable

The euro area economy is showing mixed signals. Manufacturing has experienced a boost as companies accelerated orders in anticipation of new tariffs. In contrast, the services sector is exhibiting signs of slowing. The ECB emphasized that rising real incomes, improved financing conditions, and healthy corporate balance sheets are helping to cushion the impact of external pressures.

Nevertheless, risks to growth remain tilted to the downside. Uncertainty surrounding global trade—particularly in relation to U.S. tariffs, which affect 17% of euro area exports beyond the EU—has subdued investment and consumption. Geopolitical tensions in the Middle East and Russia are compounding this uncertainty, though any resolution in these regions could lift investment sentiment and growth prospects.

Inflation Dynamics: stabilising but uncertain

Headline inflation is gradually aligning with the ECB’s target. Energy price inflation fell by 0.3%, and services inflation dropped from 4% to 3.2% in April. The April rise was largely due to Easter-related travel costs. A stronger euro is also expected to exert downward pressure on inflation. ECB projections suggest inflation will remain near target through 2027.

Still, medium-term risks linger. Infrastructure and defence spending could stoke inflation, while climate change-induced food price volatility adds another layer of complexity. The inflation outlook, according to the ECB, is “more uncertain than usual.”

Rates and Borrowing: a window of opportunity

The rate cut has made corporate borrowing more affordable, which could support investment in the near term. However, financial stability risks are still elevated, requiring careful calibration of future policy actions. The ECB did not discuss the “neutral rate” at this meeting but acknowledged the need for vigilance as policy approaches that zone—particularly in the absence of major economic shocks.

Forward Guidance: room for adjustment, not indecision

When asked whether a larger cut or a pause was considered, Lagarde noted the current rate levels place the ECB in a strong position to respond to evolving conditions. Only one Governing Council member dissented from the decision. With the latest move, the ECB believes it is nearing the end of this cycle, though further cuts could be on the table—depending entirely on forthcoming data.

Outlook

Despite short-term headwinds, the ECB’s tone remained cautiously optimistic. Q1 GDP figures may be revised upward thanks to improved investment and tariff-related order buildups. For now, the euro area appears well-positioned, albeit delicately balanced, between resilience and risk.