European Central Bank Lowers Interest Rate to 2%

6th June 2025

The European Central Bank (ECB) has reduced its key interest rate by 0.25 percentage points to 2%, marking the eighth cut in a year amid easing inflation and ongoing trade tensions.

President Christine Lagarde reaffirmed her commitment to complete her term, dismissing speculation about a potential early departure.

Based on the latest updates, the ECB's key interest rates currently stand at:

Deposit facility rate: 2%

Main refinancing operations rate: 2.15%

Marginal lending facility rate: 2.4%.

These adjustments were part of the ECB's ongoing series of rate cuts—which is now the eighth reduction over the past year—in an effort to support the eurozone economy as inflation has slipped to around 1.9%, nudging below the longstanding 2% target.

The policy stance reflects concerns over slowing economic growth and global uncertainties, including trade tensions, prompting a more cautious outlook as policymakers work on balancing monetary stimulus with financial stability.

ECB rate changes can have a ripple effect across the lending landscape, affecting both personal loans and mortgages in several key ways:

Direct Impact on Borrowing Costs: When the ECB lowers its key interest rates, commercial banks benefit because their own cost of borrowing reduces. This reduction is often passed on to consumers in the form of lower interest rates on various loans. For borrowers with variable-rate loans—such as tracker mortgages, which are directly linked to benchmark rates (often the Euribor influenced by ECB policy)—this means a direct and immediate drop in monthly repayments. In essence, if the ECB cuts its rate by 0.25%, you can expect a similar reduction in your variable-rate loan, making your borrowing costs cheaper almost overnight.

Differences in Loan Types: The impact of these rate changes varies according to the specific nature of your loan agreement:

Variable-Rate Mortgages and Loans: These respond directly to changes in the ECB's rate. For instance, if the ECB reduces rates, the interest on your variable-rate mortgage falls correspondingly, lowering your monthly repayments without delay.

Fixed-Rate Mortgages: With fixed-rate products, the interest cost is locked in for a predetermined period. Consequently, existing fixed-rate borrowers won't see an immediate benefit when the ECB cuts rates. However, if market conditions remain favorable with lower rates over time, fixed-rate borrowers might have the chance to refinance their mortgages at more attractive terms once their current agreements mature.

Hybrid Loans: These combine elements of fixed and variable products. They may offer some initial protection with fixed rates, yet later adjustments to a variable rate phase can allow borrowers to eventually benefit from lower rates .

Broader Economic Effects: Lowering rates isn’t solely about reducing monthly payments—it’s also a deliberate strategy to stimulate economic activity. Cheaper loans encourage borrowing, which can drive consumer spending and investment. However, the full impact depends on several factors, including the prevailing mix of loan products in the market and how quickly banks adjust their offerings in response to changing funding costs. Over time, while the reduction can ease cash flow pressures on households, it may also influence future lending terms and the overall structure of debt in the economy.

The next UK announcement by the Bank of England on interest rates is on 19 June 2025.