ECB cuts interest rates again as Trump tariff fears threaten recovery

FRANKFURT - The European Central Bank (ECB) lowered interest rates for the seventh time since June 2024 as trade tensions threaten to derail the region’s economic recovery.

The deposit rate was decreased by a quarter point to 2.25 per cent, as predicted by almost all analysts polled by Bloomberg. The ECB dropped the word “restrictive” from its statement in relation to the monetary policy stance. But markets boosted bets on further cuts in borrowing costs as officials underscored the headwinds that Europe currently faces.

“Downside risks to economic growth have increased,” ECB president Christine Lagarde told reporters on April 17 in Frankfurt, stressing that it will still take time for the full consequences of US tariffs to become clear.

“The major escalation in global trade tensions and associated uncertainties will likely lower euro area growth by dampening exports, and it may drag down investment and consumption,” she said. “Deteriorating financial market sentiment could lead to tighter financing conditions.”

German bonds erased losses, with the 10-year yield slightly down on the day to 2.5 per cent. The euro extended an earlier decline, falling as much as 0.6 per cent to US$1.336. Markets now foresee three more reductions in the deposit rate before the year is out.

“The forwarding-looking view on the economy implies an expected shock from tariffs, and the characterisation of ‘exceptional’ uncertainty implies an openness to further monetary easing – assuming the trade shock persists and is borne out in the data,” said Mr Mark Wall, chief European economist at Deutsche Bank. “We continue to expect another rate cut in June and a terminal rate of 1.5 per cent by the year end.”

With the ECB having just weeks ago been pondering a pause in its easing campaign, President Donald Trump’s recent announcement of

sweeping tariffs on the US’ trading partners

tilted support within the bank back towards a further reduction.

The prospect of another move became more attractive to policymakers as inflation continued to retreat towards the ECB’s 2 per cent goal, and was bolstered by falling energy costs and a plunge in confidence indicators.

A surprise gain in the euro, meanwhile, has elevated the common currency to a three-year high against the dollar.

“Investor sentiment has proven more resilient towards the euro area than towards other economies,” Ms Lagarde said, reiterating that the ECB does not target a particular exchange rate.

The ECB’s new language indicates that officials now consider policy to be within the range of estimates for neutral – a level that neither stimulates nor restricts economic activity. It remains unclear if they see the need to cut borrowing costs beyond that territory.

With inflation already on the back foot, the fear now is that US levies will extinguish hopes for a revival in the euro zone’s 20-nation economy – potentially dragging consumer price growth below the target.

Despite some backtracking by Mr Trump, European Union products face 10 per cent tariffs for 90 days, with no firm indication on what happens beyond that. His stand-off with China, meanwhile, has spiralled – raising the risk that some of its goods are diverted to Europe at discounted prices.

The Federal Reserve finds itself in a trickier bind and may be forced to stand pat until there’s greater clarity. Chairman Jerome Powell

warned on Wednesday

that a weakening economy and elevated inflation could bring its dual goals of price stability and maximum employment into conflict.

In contrast, March data from the euro area confirmed frequent statements by ECB officials that disinflation is on track. Prices rose by just 2.2 per cent from a year ago, while the closely watched services component eased to 3.5 per cent from 3.7 per cent as wage pressures abated.

“Increasing global trade disruptions are adding more uncertainty,” Ms Lagarde said. “Falling global energy prices and the appreciation of the euro could put further downward pressure on inflation. This could be reinforced by lower demand for euro-area exports owing to higher tariffs and a rerouting of exports into the euro area from countries with overcapacity.”

Economists polled by Bloomberg before April 17’s decision predict another cut in borrowing costs at the ECB’s next policy meeting, in June, after which they will be held at 2 per cent at least until the end of 2026.

The volatile backdrop, however, has left Goldman Sachs, Deutsche Bank and Bank of America forecasting deeper reductions.

Most policymakers are cagey on their outlook for rates. Besides the trade chaos, they are still trying to compute the effects of massive infrastructure spending in Germany and heftier military outlays across the continent in the years ahead.

“It will be a question of agility in the face of what we are seeing, and that will require a cohesive approach that will be based more than ever on the analysis of data,” Ms Lagarde said. “More than ever now we need to be data dependent. And we need to rely on safe, reliable data.” BLOOMBERG