ECB's stance: Inflation target largely achieved, monetary policy intervention "has ended," future interest rate adjustments will not be significant

The European Central Bank (ECB) senior officials have been sending signals that the interest rate cut cycle is nearing its end, with a possibility of a slight rate cut in the future.

Data released on Tuesday showed that the Eurozone's harmonized CPI preliminary value for June increased by 2% year-on-year, in line with expectations and reaching the ECB's target level, up from 1.9% in May. This data provides a rationale for the ECB to pause interest rate cuts and echoes statements from several senior officials—as inflation returns to the target range, the rate cut cycle has entered its final stage, and any future actions will likely be minor adjustments.

On Monday Eastern Time, at the ECB's annual forum held in Sintra, Portugal, senior officials shared their experiences in responding to this "once-in-a-generation" inflation shock and sent a consistent signal regarding future policy paths.

Governing Council member Martins Kazaks stated that inflation has returned to the 2% target, and the economy is still growing, so there is no need for significant rate cuts; any future adjustments will be minor at most. Chief Economist Philip Lane noted that the previous round of combating inflation has ended, successfully reducing inflation from a peak of 10% to 2%. Belgian central bank governor Wunsch also mentioned that the main task of Eurozone inflation has been completed. If adjustments are needed in the future, they are likely to be in the direction of rate cuts.

However, ECB President Christine Lagarde remains cautious, emphasizing at the meeting that the future world will be more unpredictable, and uncertainty could lead to more volatility in inflation. German central bank president Nagel also warned that prices are currently in "calm waters," but one should not let their guard down.

Latest Data Supports "Pause on Aggressive Rate Cuts" Argument

The preliminary inflation data for June released by Eurostat on Tuesday showed that the Eurozone's harmonized CPI increased by 2% year-on-year, in line with market expectations and just reaching the ECB's target level, up from 1.9% in May. This is attributed to the strengthening euro, declining energy costs, and the sluggish economic growth across the 20 Eurozone countries, all helping to curb price pressures.

Core inflation (excluding food and energy) remained at 2.3% year-on-year, with service prices slightly rising to 3.3%.

Bloomberg analyst Simona Delle Chiaie noted that while the overall inflation slowdown has progressed significantly, the rebound in service inflation is a signal that requires vigilance. However, she expects service price pressures to ease again, mainly due to slowing wage growth and weakening economic activity.

"Currently, the risk of a sharp rise in oil prices is not imminent, so we still expect the ECB to cut rates by 25 basis points in September."

By country, Germany's inflation unexpectedly slowed, while France and Spain saw slight increases, and Italy remained unchanged.

Additionally, the latest consumer surveys also indicate that Eurozone residents' inflation expectations for the next 12 months and the next three years are both declining.

Market Expectations: Another Slight Rate Cut in September

The money market currently widely expects that the ECB will remain steady at the July meeting, with a slight rate cut in September, bringing the deposit rate down to 1.75%. The market generally believes that the next meeting in September will provide more clarity, by which time the trade relations between the EU and the US may have been settled The background is that since the outbreak of the Russia-Ukraine conflict, energy prices in Europe have soared, leading to severe inflation, with the inflation rate in the Eurozone once reaching a historical high of 10%. However, as of June this year, the overall inflation rate in the Eurozone has fallen back to 2%, in line with the European Central Bank's target level of 2%.

To curb inflation, the European Central Bank has significantly raised interest rates over the past two years, bringing the benchmark rate to a historical high of 4%. However, as inflationary pressures eased, the ECB has begun to shift towards easing over the past year, lowering the key rate from its peak of 4% to 2%. Since June 2024, the ECB has consecutively lowered the deposit rate eight times, from the peak of 4% to 2%.

The ECB's latest forecast is that inflation will briefly fall below 2% next year before returning to the 2% target by 2027. This decline benefits from the appreciation of the euro, which reduces import costs but also weakens export competitiveness.

Kazaks: Limited room for rate cuts, more of a "fine-tuning" or "insurance-style rate cut"

Martins Kazaks, a member of the ECB Governing Council and Governor of the Bank of Latvia, stated that as long as the economy develops according to the latest forecasts, the ECB will at most make minor adjustments to interest rates.

Kazaks pointed out:

“Inflation has returned to the 2% target, and the economy is growing, so there is no need for more aggressive measures, especially since the easing policies since June last year are still being transmitted to businesses and households.”

At the Sintra Forum, Kazaks further explained:

“If interest rates are to move, it will be a cut rather than a hike. But it won't be a big move. It will be more about sending signals and making fine adjustments. There may also be an 'insurance-style rate cut' to ensure that if inflation is below 2% by early 2026, it can return to the target level.”

However, he also cautioned that it is still too early to discuss future adjustments, as the economic outlook is highly uncertain.

Kazaks stated:

“We do not consider the exchange rate as a target, but it does affect inflation and economic growth. The euro has fluctuated significantly this year, which has already suppressed inflation. If the euro continues to appreciate significantly, it may further suppress inflation and exports, which would make us inclined to cut rates again.”

Lane: The inflation shock phase task is complete, but flexibility is needed

On Tuesday, Philip Lane, the ECB's chief economist, stated at the ECB's annual forum held in Sintra, Portugal:

“We believe the previous cycle has ended, and the task of bringing inflation down from the peak of 10% back to 2% has been completed.”

When asked what the end of the cycle means, Lane explained that it means the ECB has basically cleared the price shocks caused by the energy crisis and supply chain bottlenecks in 2021 and 2022.

However, Lane also emphasized that although this round of shocks has passed, new shocks have emerged in the economic system, and future monetary policy may still make minor adjustments based on economic conditions:

“From a forward-looking perspective, we still need to remain prepared to ensure that any small deviations in inflation do not evolve into long-term trends and do not alter medium-term inflation expectations He also stated that the European Central Bank will no longer respond to the price shocks of the past few years, but will focus on changes in the energy market, exchange rate fluctuations, and inflation expectations, avoiding overreacting to slight fluctuations in inflation. Additionally, the ECB will not overlook any persistent changes that may arise in the medium-term economic outlook.

Belgian Central Bank Governor Wunsch: Further rate cuts are "more likely direction"

Belgian Central Bank Governor Wunsch, also in Sintra, expressed:

"We are now very close to the European Central Bank's 2% inflation target, and this work is largely completed."

However, he also pointed out that economic growth in Europe has been very slow for two consecutive years, and global uncertainty may continue to hinder the economic recovery process:

"If we need to take more action, it is likely to be a downward adjustment, that is, further rate cuts. I am not calling for this, but if we are to discuss the direction of interest rates, it is more towards this direction."

Wunsch also stated that the ECB will monitor economic data in the coming months to observe whether economic growth in the Eurozone improves, especially in production. If the economy does not show improvement, the ECB may need to increase economic support.

ECB focuses on trade risks and slowing growth

Regarding US-EU trade negotiations, Kazaks expressed confidence that the results of the negotiations will largely maintain the status quo:

"Both sides are aware that they do not want to collapse their own economies, so some agreement will definitely be reached. If the final result is that the US maintains a 10% tariff and the EU does not retaliate, that is still within our baseline forecast range."

According to CCTV News, currently, the US imposes a 50% tariff on EU steel and aluminum products, a 25% tariff on the automotive sector, and a 10% baseline tariff on almost all other goods. President Trump has also threatened that if there is no breakthrough in US-EU trade negotiations by July 9, he will impose a 50% tariff on EU goods.

At the same time, ECB Vice President Luis de Guindos reminded that although the economy performed strongly in the first three months of 2025, partly due to companies stockpiling in response to tariff risks, growth in the second and third quarters is likely to be close to zero, with risks skewed to the downside. He stated:

"We are in a good position, and the risk of inflation being below target is not significant. Geopolitical risks need to be considered, but we believe we can achieve price stability."