The European Central Bank cuts interest rates again, with falling inflation and trade pressures as the main reasons.

In a first in eight months, the inflation rate fell below the 2% mark, and with the continuous impact of the United States tariff policies on the economy, the European Central Bank announced a 25 basis point cut in the deposit rate to 2% on June 5 local time, in line with market expectations. This is the ECB's eighth rate cut since July 2024, further signaling a loose monetary policy. The European Central Bank stated in its announcement: "The current inflation rate is close to the 2% medium-term target set by the Governing Council." Despite the inflation rate falling to a low of 1.9% in May, policymakers remain cautious. The statement specifically mentioned that the trade protectionism policies implemented by the Trump administration are putting short-term pressure on European business investments and exports, although the increased defense and infrastructure investments by various governments may provide support for economic growth in the medium to long term. Market reactions confirmed the impact of the policy adjustment: German ten-year government bond yields fell by about 5 basis points to 2.48%, indicating growing risk aversion; the euro to US dollar exchange rate briefly surged before falling back to 1.1418, basically remaining at pre-cut levels. The currency market slightly increased bets on the extent of further rate cuts this year, expecting a total cut of 33 basis points, equivalent to another 25 basis point cut with a one-third probability of another cut. Economic data shows a more pronounced slowdown in the Eurozone economy. Data this week showed that the inflation rate in May dropped to 1.9%, falling below 2% for the first time in eight months and the second time since 2021. The slowdown in the economy is mainly due to the deceleration in the rise of service prices, which had previously been the focus of policymakers. Wage growth has also cooled, supporting the assumption that wage growth will slow down after catching up with inflation and will help the European Central Bank achieve its price stability target. Trade policy uncertainty remains the biggest risk variable. Currently, EU exports to the US face a 10% tariff, which could rise to 50% if negotiations collapse in July. Although there are signs of easing in EU-China trade relations, ongoing geopolitical games continue to disrupt business investment decisions. The Eurozone's composite PMI in May only recorded 50.2, barely maintaining the expansion range, reflecting that private sector activity is almost stagnant. It is worth noting that there is disagreement within the European Central Bank about the future policy path. Hawks, represented by Executive Board member Schnabel, warned that the plans of NATO member countries to increase military spending may push up prices, adding to the pressure of demographic changes and supply chain restructuring, and the medium-term inflation risks cannot be ignored. The latest quarterly forecast shows that the Eurozone's inflation rate may drop to 1.6% by 2026, below the target level, and economic growth expectations have also been revised down. German Chancellor Scholz is scheduled to meet with Trump at the White House on Thursday night, with trade issues expected to be a core topic. Prior to this, most economists expect the European Central Bank to stay put in July and implement a final rate cut in September, in line with market expectations. The end of this rate-cutting cycle will depend on the direction of the tariff game, the strength of fiscal stimulus, and whether inflation will unexpectedly fall below expectations.