The European Central Bank cut its main interest rate to 2 per cent, the lowest since 2022, as it warned of the risks of undershooting inflation and slowing economic growth caused by President Trump’s tariff threats.
The bank’s governing council voted to trim the eurozone’s main deposit rate by 0.25 percentage points, in line with market expectations and the eighth rate cut since June 2024. Only one rate-setter dissented.
A June interest rate cut was deemed all but inevitable after data showed annual consumer price inflation fell below the ECB’s 2 per cent target at 1.9 per cent in April. The ECB also updated its forecasts which cut expected inflation to an average of 1.6 per cent in 2026 from 2 per cent this year, “reflecting lower assumptions for energy prices and a stronger euro”.
The ECB has been easing monetary policy at the fastest pace of any major central bank this year, as the Bank of England and US Federal Reserve continue to have concerns about stubborn inflation. Christine Lagarde, the ECB president, refused to give financial markets further guidance about how low interest rates could fall this year. She said the current stance of monetary policy was in a “good place’ and policymakers were not on any “pre-set path” and would continue to be led by economic data.
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ECB staff published a series of scenarios showing the impact that an escalating trade war could have on the single currency area. In the most extreme scenario where the US goes ahead with wide-ranging tariffs of 50 per cent on EU imports and 120 per cent on China, the eurozone economy would suffer a 1 per cent fall in GDP by 2027 and inflation would be around 1.8 per cent, leading to more interest rate cuts.
In a “mild” scenario where the EU and US agree a zero-tariffs deal on industrial goods, economic growth would be up to 0.4 percentage points higher and inflation would also rise to around 2 per cent from next year, reducing the odds of further monetary loosening.
Lagarde said the path for inflation was “more uncertain than usual, as a result of the volatile global trade policy environment”. She repeatedly warned of the disinflationary impact of having a stronger currency, as the euro has gained 10 per cent against the dollar this year, to stand at at $1.14. A higher exchange rate makes the prices of imports cheaper for Europeans but hurts the competitiveness of the continent’s exporters. The euro strengthened by 0.2 per cent against the dollar on Thursday.
Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, said the ECB’s next moves would be determined by trade talks between EU officials and their White House counterparts in the coming weeks. Trump has ramped up his tariffs threats on the bloc with a potential 50 per cent universal levy that is on pause until July 9.
“The outcome of the July and September ECB meetings will be driven by the US-EU trade negotiations but beyond that, the central bank will be reluctant to ease well below neutral. Right now the market expects the ECB to pause in July but everything could change again in six weeks,” Ducrozet said.
Jack Allen-Reynolds, deputy chief euro-zone economist at Capital Economics, said the ECB was likely to carry out one more rate cut in September and then hold at 1.75 per cent. This compares with market expectations of the Bank of England’s base rate hitting 4 per cent by the end of the year and for no changes to US borrowing costs of 4.25-4.50 per cent.