Just on Tuesday, inflation figures from the eurozone provided further arguments in favor of a rate cut.

According to a preliminary estimate from Eurostat, the inflation rate dropped to 1,9 percent year-on-year in May, down from 2.2 percent in April. This marks the lowest level of inflation since September 2024 and brings it below the ECB’s target rate of 2 percent.

The decline was sharper than economists had expected, as they had forecast a rate of 2,0 percent.

«The ECB will likely be pleased that inflation is now just below its 2 percent target,» commented Commerzbank Chief Economist Jörg Kramer. Although core inflation (excluding energy, food, and tobacco) remains somewhat higher at 2,3 percent, it is expected to decline further in the coming months.

Further Decline in Core Inflation Expected

A stronger euro and an anticipated flood of goods from China—resulting from the trade conflict with the U.S.—are expected to exert downward pressure on prices in Europe.

«Therefore, the ECB will likely not stop with Thursday’s rate cut. We expect another rate move after the summer break,» Commerzbank added.

«The ECB has the green light for a rate cut next week,» said Thomas Gitzel, economist at VP Bank. However, whether further cuts will follow immediately remains uncertain. If the deposit rate drops below the 2 percent mark (currently at 2,25 percent), the resulting real interest rate would be negative—potentially increasing inflation risks in the future.

Pause in July – But Cycle Not Over

Tomasz Wieladek, Chief European Economist at T. Rowe Price, expects a pause in July following a rate cut this week. With a cut to 2 percent, the ECB would reach the so-called «neutral interest rate.» However, it is unlikely this will mark the end of the rate-cutting cycle.

The ECB might leave rates unchanged in July to assess the economic impact of U.S. tariffs on Europe and the global economy. Wieladek anticipates further negative surprises this year.

«Nonetheless, the ECB will be cautious about cutting rates below 1 percent, unless the global economy is clearly heading into recession,» he said. He expects a rate reduction to 1,25 percent within this year.

Bank of America Also Predicts a 25 Basis Point Cut

«We expect the ECB to lower key interest rates by 25 basis points this week and leave forward guidance largely unchanged,» according to the ECB outlook from Bank of America. This would align with weaker short-term growth prospects and a slight but persistent undershooting of the inflation target.

»Forecast uncertainty is high, as it remains unclear to what extent the German fiscal package will be implemented.»

Data Will Set the Pace

It is widely expected that ECB President Christine Lagarde will emphasize three elements: inflation, massive uncertainty, and the need to remain data-dependent in decision-making.

She will likely avoid any precommitments and keep all options open. In anticipation of potential shifts in trade policy over the coming weeks, she is expected to stress the importance of being able to react flexibly.

The door to a rate cut below 2 percent will therefore remain open.