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The European Central Bank has cut its benchmark interest rate by a quarter-point to 2.25 per cent as it prepares for economic fallout from the trade war ignited by US President Donald Trump.
Thursday’s cut, 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 in comments that accompanied the rate decision. It added that “the adverse and volatile market response to the trade tensions is likely to have a tightening impact on financing conditions”.
But it dropped language from last month that referred to monetary policy becoming “less restrictive” in what some saw as a hint there could be less room to cut rates in the future.
Pooja Kumra, rates strategist at TD Securities, said the ECB’s language change appeared hawkish but also highlighted the bank’s warning on the risks tariffs posed to growth, adding: “Feels that’s a balancing act between hawks and doves.”
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.
Trump 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!”
The ECB’s cut this week is the seventh reduction since it started cutting its deposit rate last June.
Traders stuck to their bets of at least two further quarter-point cuts by the end of this year, according to levels implied by swaps markets after the decision.
The euro was little changed at $1.135 immediately after the cut.
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 is 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 — marginally above the ECB’s 2 per cent target — 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.
