ECB cuts interest rates as UK ‘hesitation’ risks dealmaking strength
Interest rates in the eurozone have been cut, taking the deposit facility rate to two per cent as fresh data suggested inflation came in just under the European Central Bank (ECB)’s two per cent target rate in May.
The cut means the ECB’s rate now stands at two per cent, a halving of rates set two years ago.
It also reflects ECB’s radical approach to its rate-cutting cycle after inflation across some of the world’s biggest economies spiked in the wake of Russia’s invasion of Ukraine.
The speed of interest rate-cutting across Europe has been consistent with a downward trajectory in the inflation rate across the continent, with new data published alongside the ECB’s rate decision showing that consumer price growth could be 1.6 per cent next year.
While economic growth has been lower across major EU economies compared toin the UK – and could yet face greater damage from President Trump’s erratic trade policies – investors believe Europe is now on the “front foot” for dealmaking as added cost pressures across the Channel risk leaving London behind.
Claire Trachet, who founded an M&A advisory based in the UK, said the ECB’s rate cut “narrows the cost of capital across Europe” and puts it in a more competitive position.
“Hesitation at home is already costing us: inward takeovers of British firms have hit their highest value in almost three years, while domestic buyers remain largely on the sidelines,” Trachet told City AM.
‘Window to accelerate deals’
Cyril Aboujaoude of the private equity firm Tioopo Capital said: “A rate cut from the ECB puts European markets on the front foot.
“With borrowing costs now less than half those in the UK, the relative appeal of deploying capital into EU-based businesses has strengthened. For growth-focused investors, that creates a window to accelerate deals.”
A recent report by the law firm Taylor Wessing and Bayes Business School found that the UK saw the second highest level of merger and acquisitions (M&A) deals between 2018 and 2024, ahead of the likes of Germany and France despite concerns Brexit would harm the UK’s reputation.
But data earlier this week pointed to the strength of foreign businesses over UK companies as inward M&As outstripped dealmaking made between British firms as well as outward deals where UK businesses take over companies overseas.
Interest rate cuts under question
Markets believe the ECB is less likely to authorise further interest rate cuts this year, with most analysts believing only one more 25 basis point cut this year.
ECB officials said they were still monitoring high wage growth levels ahead of making any further cuts but recognised levels had continued “to moderate visibility” while profits at European firms were “partially buffering its impact on inflation”.
“Inflationary pressures in the eurozone are receding faster than expected,” Carsten Brzeski, global head of macro at ING, said.
“Not only did US President Donald Trump make the European economy great again – for one quarter, as frontloading of exports and industrial production boosted economic activity – he also made inflation almost disappear.”
Lindsay James, investment strategist at wealth manager Quilter, said the prospect of EU retaliation against President Trump, who rowed back on his threat to impose 50 per cent tariffs on the bloc, was likely to put the ECB on high alert ahead of future decisions.
“While the [ECB] seems to have u-turned on this in today’s release with claims further trade tensions would see growth and inflation come in below baseline projections, as there is yet to be a trade agreement with the US, it comes as little surprise that the ECB has maintained its data dependent approach for now,” James said.