Unlock the White House Watch newsletter for free
Your guide to what the 2024 US election means for Washington and the world
The European Central Bank has cut its benchmark interest rate by a quarter-point to 2.25 per cent as it prepares for the economic fallout from the trade war ignited by US President Donald Trump.
Thursday’s unanimous decision by the ECB’s rate-setters, which brings borrowing costs in the currency bloc to their lowest in more than two years, had been widely expected after Trump’s announcement of sweeping tariffs on most of the US’s trading partners on April 2.
“The outlook for growth has deteriorated owing to rising trade tensions,” the ECB said, adding that “the adverse and volatile market response” to the tariffs was likely to have a “tightening impact on financing conditions” for businesses and consumers.
ECB president Christine Lagarde highlighted the “exceptional uncertainty” confronting the economy, while maintaining that inflation was on track to come down to the bank’s 2 per cent target.
“Euro-area exporters face new barriers to trade, although their scope remains unclear,” she said, adding that “disruption to international commerce, financial market tensions and geopolitical uncertainty are weighing on business investment”.
Analysts and asset managers at institutions including Fidelity and Morgan Stanley said the meeting was relatively dovish.
While the ECB said last month that monetary policy had already become “less restrictive”, it dropped the reference from Thursday’s statement, with Lagarde describing it as “meaningless at this point in time”.
The ECB’s cut this week is the seventh reduction since it started cutting its deposit rate last June.
“Make no mistake, this marks a dovish shift by the ECB,” Claus
Vistesen, chief Eurozone economist at Pantheon Macroeconomics, wrote
in a note to clients.
Ahead of the decision, Trump compared the ECB’s rate-cutting record with the US Federal Reserve, which kept rates on hold at its last meeting in March.
The US president said Fed chair Jay Powell, who warned on Wednesday of the tariffs’ impact on US growth and inflation, was “always TOO LATE AND WRONG” and his “termination cannot come fast enough!”
Asked about those comments, Lagarde said she “had a lot of respect for Powell, whom she described as “my esteemed colleague and friend” and stressed the “fundamental” principle of ECB independence.
Traders stuck to their bets of at least two more quarter-point cuts by the end of this year, and pushed up the chance of a third cut to around 60 per cent, according to levels implied by swaps markets.
“The acknowledgment of slowing inflation, while highlighting risks to real activity are a strong signal [of further cuts],” said Tomasz Wieladek, chief European economist at asset manager T Rowe Price.
German Bunds rallied, with the yield on rate-sensitive two-year bonds, which moves inversely to price, falling 0.05 percentage points to 1.69 per cent.
The euro was little changed at $1.137 in trading after the cut.
Lagarde said that, while the ECB knew the US tariffs were “a negative demand shock” with “some impact on growth”, the impact on inflation would only become clearer over the course of time.
On the one hand, she said, lower energy prices, a stronger euro and increased imports from China could drive inflation down. But, she added, fragmenting supply chains could also increase upward pressure on prices, as could higher government spending on defence and infrastructure.
Trump performed a partial U-turn last week, delaying his full “reciprocal tariffs” of 20 per cent on EU goods for 90 days, during which time a rate of 10 per cent will apply. But top central bankers say his protectionist policies are still likely to be a negative economic shock for the Euro area.
The ECB was already confronting slower growth and cooling price pressures. In March, the central bank cut its 2025 growth forecast for the Eurozone to 0.9 per cent — its sixth consecutive reduction.
Inflation edged down last month to 2.2 per cent as service prices rose at their slowest pace for almost three years.
Economists say inflation could be driven further down by this month’s oil price fall, the recent rise in the euro against the dollar, and a potential surge in Chinese imports to the Eurozone. All three developments are widely seen as consequences of Trump’s trade policy, at least in part.
But the increase in debt-funded spending in Germany and elsewhere in the Eurozone could prove an inflationary pressure.
