The European Central Bank cut its key deposit facility rate by 25 basis points to 2.25% on Thursday in a unanimous Governing Council decision, marking the seventh reduction in the current easing cycle. President Christine Lagarde said additional cuts are likely if economic conditions continue to deteriorate, signaling a notably more dovish stance than her March commentary.
The euro fell 0.9% against the dollar to $1.0784 in the immediate aftermath, while the German 10-year bund yield dropped 8 basis points to 2.18% — its lowest level since December. The Euro Stoxx 50 closed up 1.4% to 5,312, with rate-sensitive sectors including utilities, real estate, and financials leading the gains.
PMI Signals Recession Risk
The decision came on the same day S&P Global released a deeply disappointing flash composite PMI for April. The Eurozone composite reading fell to 47.8 from 50.2 in March, the largest single-month decline since the pandemic onset, and the lowest level since November 2023. Manufacturing PMI plunged to 45.6 while services dipped below 50 for the first time in 14 months at 49.2.
Germany was the principal drag, with its composite reading collapsing to 46.2. The German auto sector continues to struggle with Chinese EV competition and weak export demand from the Iran-disrupted Asian markets, while construction remains in deep recession. France's composite came in at 47.1, also reflecting renewed contraction.
Inflation Confidently Below Target
Eurozone headline inflation has fallen to 1.9% year-over-year, comfortably below the ECB's 2% target, while core inflation has eased to 2.1%. Wage growth, which had concerned policymakers through much of 2024 and 2025, has decelerated to 3.1% in the latest negotiated wages indicator, finally aligning with productivity-consistent levels.
Money market futures now imply two more 25-basis-point cuts before year-end, taking the deposit rate to 1.75% by December — a level last seen in October 2022. Goldman Sachs European economist Sven Jari Stehn forecasts the terminal rate at 1.50% in early 2027, while Deutsche Bank's Mark Wall expects the cycle to bottom at 1.75%. The dovish ECB pivot complicates Federal Reserve policy by widening the trans-Atlantic rate differential and putting renewed downward pressure on the euro.