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The European Central Bank has signalled it is nearing the end of its rate-cutting cycle as it lowered borrowing costs by a quarter point to 2 per cent in response to uncertainty over the impact of Donald Trump’s trade war.
Following the widely expected cut, ECB president Christine Lagarde said the central bank had “nearly concluded” the latest monetary policy cycle, which has led to rate-setters halving borrowing costs from a peak of 4 per cent since June 2024.
The Eurozone would be in a “good position to navigate the uncertain conditions” facing the bloc, she added in an apparent reference to trade tensions between the US and EU.
The euro climbed following Lagarde’s remarks, trading 0.3 per cent higher against the dollar at $1.145 by late afternoon in Europe. Traders reined in their bets on rate cuts, with swaps markets pricing in just one further reduction in the second half of the year. Prior to a press conference on Thursday at the ECB’s headquarters in Frankfurt, markets had implied a small chance of two further cuts.
“She said several times ‘we are well positioned at the moment’,” noted Andrew Kenningham at Capital Economics. “[This] perhaps implies that interest rates don’t need to [fall] any more.”
Kaspar Hense, a portfolio manager at RBC BlueBay Asset Management, said: “For the time being, the ECB can claim to have achieved a soft landing for Europe and the last mile seems to have come to an end.”
Lagarde was questioned about her future at the institution, after World Economic Forum founder Klaus Schwab told the Financial Times that she had discussed cutting short her term as ECB president to join the body behind the annual meetings of business and political leaders in Davos in Switzerland.
She insisted: “I am determined to complete my term. Period.”
The central bank on Thursday lowered its inflation outlook for this year to its medium-term 2 per cent target, down from the 2.3 per cent it predicted in March. It also revised its estimate for 2026 to 1.6 per cent from 1.9 per cent previously, which Lagarde said was driven by volatile oil and gas prices and the stronger euro.
The currency has unexpectedly strengthened since the US president’s “liberation day” tariff announcements.
Core inflation, which strips out those volatile factors, is “hardly moving”, Lagarde said. The bank expects inflation to return to its 2 per cent target in 2027.
Lagarde acknowledged that “uncertainty surrounding trade policies” risked weighing on “business investment and exports, especially in the short term”.
But the bank has not changed its expectations for GDP growth of 0.9 per cent in 2025 and 1.1 per cent in 2026, arguing higher real incomes and a “robust” labour market “will allow households to spend more”.
Additional reporting by Alan Livsey in London
