Key Takeaways:

• The ECB could cut interest rates to 2% by summer 2025.
• Governing Council member Francois Villeroy de Galhau remains dovish on policy.
• Uncertainty clouds the outlook beyond summer, with debates on further cuts.

ECB Rate Cuts Expected, But Future Direction Unclear

The European Central Bank (ECB) could lower interest rates to 2% by this summer, but its future policy direction remains uncertain, according to Governing Council member Francois Villeroy de Galhau.

“We are the first major Western central bank to begin a rate-cutting cycle last year,” said Villeroy, who also serves as Bank of France chief, in an interview with Alternatives Economiques. “At this point, we could reach 2% by summer.”

Diverging Views Within the ECB

Villeroy’s remarks reinforce his dovish stance, contrasting with the more cautious approach of Executive Board member Isabel Schnabel. Schnabel has urged policymakers to consider when to pause or halt rate cuts, arguing that with the current deposit rate at 2.75%, it’s unclear whether monetary policy remains restrictive.

Villeroy’s outlook is more aligned with investor expectations, as markets are pricing in over 70 basis points of cuts by September 2025. According to analysts surveyed by Bloomberg, the ECB’s deposit rate could drop to 1.75% by 2026.

Global Uncertainty Clouds ECB’s Path

Despite the projected rate cuts, economic uncertainty remains a key factor influencing future decisions.

“Deciding on a policy direction beyond summer would be a mistake,” Villeroy cautioned. “For now, we must wait and evaluate inflation trends in the second half of the year.”

Conclusion

As the ECB navigates its rate-cutting cycle, financial markets are closely watching inflation data and economic signals. While a 2% interest rate by summer seems likely, the long-term trajectory remains uncertain.