ECB: did Lagarde just close the door on further interest rate cuts?

The European Central Bank (ECB) voted unanimously at its September meeting to hold the deposit rate at 2%. While it also slightly revised its forecasts for the rest of the year, accounting for mildly stronger economic growth and inflation remaining close to target in the medium-term, there was little overall change to its outlook. The bigger story arguably was ECB President Christine Lagarde’s declarations that “disinflation is over” and that some of the risks to growth had subsided. Nevertheless, the 15% tariff on EU goods exports to the US, coupled with continued uncertainty, will dampen demand in the second half of 2025. This could leave the door open to another rate cut towards the end of this year. 

ECB in no hurry to cut rates further

Since the ECB’s last rate-cutting meeting back in July, little has changed in the eurozone’s economic picture. Inflation has been within 0.1ppt of the 2% inflation target for 4 months, prompting ECB President Lagarde to declare emphatically that “the disinflationary process is over”. 

This statement, alongside the wider economic indicators, all suggest the economy is in a pretty good place. Inflation is at 2.1%, the eurozone’s unemployment rate is at an all-time low and the economy managed to eke out further growth in Q2, despite the headwinds from US tariffs and heightened uncertainty. 

Indeed, the ECB’s revised growth forecast points to a slightly stronger-than-expected performance in 2025 before a marginal slowdown next year. On inflation, the latest forecast sees the rate dipping below target before tracking close to 2% in 2027. This trend is in large part due to the euro’s recent strength, which has seen it appreciate 6% so far this year. 

On the face of it, there’s little evidence to suggest the eurozone’s economy needs further rate cuts. This justifies the ECB’s decision to hold interest rates at 2%.

Has the ECB finished its interest rate easing cycle?

Yet, the big risk going forward is that US tariffs and their associated uncertainty will dampen both investment and exports. This could slow growth and re-open the door to further interest rate cuts in this easing cycle. 

Adding to this is that a stronger euro simultaneously weighs on growth – because exports become more expensive for trading partners – and keeps inflation in check by making imports cheaper. An influx of cheaper imports from China, as tariffs prompt firms to look for new markets, could therefore compound this downward pressure on inflation.

However, President Lagarde was also keen to emphasise in September’s ECB press conference that “the risks to growth have become more balanced”. Her statement largely reflects signs that an EU-US tariff agreement has allowed uncertainty to fade slightly, although it remains well above typical levels. 

Additionally, a splurge of defence and infrastructure spending should help to boost growth going forward. We think it’s unlikely that the ECB will need to hike rates anytime soon, but a stronger growth outlook would ensure that there are no further rate cuts to come. 

We expect the deposit rate to remain at 2%, but the balance of risks is clearly pointed towards further easing later this year. 

Implications for Ireland

Turning our focus to Ireland, we think the end of the ECB’s easing cycle will help to minimise the upside risks around inflation. The economy remains close to full employment and was resilient enough to avoid a contraction in Q2 despite the challenges of weaker multinational investment and falling goods exports after Q1’s tariff front-running. 

Given this underlying strength, further ECB interest rate cuts would have been unsuitable for the Irish economy and would’ve risked inflation rising above the 2% target. Admittedly, inflation in Ireland is still likely to rise closer to 3% later this year regardless. This is largely down to base effects, where falling energy prices this time last year are now edging out of annual comparison data. However, we think underlying inflationary pressures should remain somewhat subdued, with inflation returning closer to 2% next year. 

Ultimately, our base case is that the ECB’s easing process is over. However, the risks are clearly skewed towards more easing later this year if US tariffs and a slowdown in global demand allow a margin of slack to emerge in the eurozone’s economies.