The ECB cut interest rates for the seventh time in a year on Thursday, as analysts had anticipated.
The interest rates on the deposit facility, the main refinancing operations and the marginal lending facility will be decreased to 2.25%, 2.40% and 2.65% respectively, with effect from 23 April 2025.
The interest rate on the main refinancing operations is the rate banks pay when they borrow money from the ECB for one week, while the rate on the deposit facility is the rate at which banks can make overnight deposits with the central bank.
The rate on the marginal lending facility, meanwhile, is the rate banks pay when they borrow from the ECB overnight.
“The disinflation process is well on track. Inflation has continued to develop as staff expected, with both headline and core inflation declining in March,” the ECB said in a statement.
“The euro area economy has been building up some resilience against global shocks, but the outlook for growth has deteriorated owing to rising trade tensions. Increased uncertainty is likely to reduce confidence among households and firms, and the adverse and volatile market response to the trade tensions is likely to have a tightening impact on financing conditions,” it added.
Trade disputes hitting growth
The bank’s decision comes as global trade tensions, driven by US President Donald Trump’s tariffs, pose a risk to eurozone growth — outweighing concerns of an inflationary spike.
Earlier this year, Germany’s approval of a historic spending package raised the region’s outlook. This is now overshadowed by trading disputes, dashing hopes of a eurozone recovery.
Donald Trump has currently placed a 10% levy on EU exports to the US and has threatened a higher rate of 20%. The prospect of a global trade war — that has tanked stock markets — has not only dampened investor sentiment, but is also pushing nervous consumers to hold on to their savings.
On top of the 10% base levy, Trump has placed a tariff of 25% on all aluminium and steel products sent to the US, as well as 25% duty on cars.
In response to these geopolitical risks, ING economists expect expansion in the eurozone to stagnate in the second and third quarters of this year, resulting in an annual GDP lift of just 0.5%. That’s compared to 0.9% last year.
“With Germany’s planned expansionary budget, improvement is still likely in 2026, but due to a weaker carry-over effect, we have also reduced next year’s growth forecast to 1.1% (down from 1.4%),” chief economist Peter Vanden Houte said. Due to the changing nature of Trump’s trade policies, he nonetheless added that the projections were highly uncertain.
Could tariffs be deflationary for Europe?
When it comes to inflation, the prospect of an economic slowdown and lower energy costs should ease price pressures, which are already returning towards the ECB’s 2% target.
Eurozone inflation (HICP) came to 2.2% in March, down from February’s 2.3% year-on-year reading. That means prices are still rising, but at a marginally slower rate.
Core inflation, which strips out volatile components such as energy and food, fell to 2.4%, the lowest reading since the start of 2022.
Annual services inflation, meanwhile, fell from 3.7% in February to 3.4%. That’s the lowest level in almost three years.
Despite the fact that tariffs make foreign imports more expensive, economists predict Trump’s trade war could actually be deflationary for the eurozone, even if the EU responds with retaliatory duties.
One reason for this is that economic uncertainty restrains spending, but there’s also the prospect of trade redirection from other countries. For instance, China is now facing levies of 145% on its products sent to the US, meaning many producers will be looking for alternative markets. If the eurozone receives a glut of redirected goods, it means that supply will increase in relation to demand, pushing prices lower.
On top of this, the euro is strong at the moment in relation to the dollar, making imports relatively cheaper for Europeans. Earlier this week, the currency reached its strongest level in three years as investors questioned the security of the greenback.
