The European Central Bank (ECB) has reduced its benchmark interest rate by 0.25% to 2.25%, marking its seventh rate cut over the past year.
This decision aims to bolster the eurozone’s economy, which is grappling with weak growth and rising global trade tensions, particularly following U.S. President Donald Trump’s recent announcement of new tariffs on imported goods, including a proposed 20% tariff on European products.
ECB President Christine Lagarde emphasised the “exceptional uncertainty” facing the global economic outlook, citing trade barriers and inflation risks.
She noted that these factors, along with increased market volatility, are likely to negatively impact financing conditions and economic expectations across the eurozone.
While inflation has eased to 2.2% in March – close to the ECB’s 2% target – growth has been sluggish, with only 0.2% expansion in the last quarter of 2024.
The ECB aims to sustain inflation at 2% while supporting growth amidst falling inflation rates in the eurozone.
Looking ahead, the ECB signaled a cautious approach, indicating that future decisions would be based on incoming economic data.
Markets anticipate potential further rate cuts later in the year, but the central bank remains vigilant, balancing the need to support growth while keeping inflation in check.
This move by the ECB could increase pressure on the Bank of England to consider rate cuts of its own, particularly if economic conditions in the UK continue to soften and inflation trends downward.
Paul Freedman, investment strategist at Omnis Investment, said: “We had expected the ECB to cut all three of their policy rates by 0.25%.
“The main reason was that CPI at 2.2% is a hair’s breadth from its 2% target and this justifies a continuing rate cutting programme.
“Like most developed markets there has been a persistent inflationary ‘last mile effect’ making it much harder to sustainably reach CPI target towards the end of the inflationary cycle but services inflation is moderating and wage growth has moderated too and is expected to moderate further throughout 2025 facilitating even more disinflation.
“The GDP outlook for Germany is improving and ongoing policy rate cuts facilitate this too.
“As things stand, our best estimate is for the ECB to cut another 2 times this year in 0.25% increments and the terminal Deposit Facility rate to rest close to about 1.75% but this is all dependent on a successful negotiated resolution to the trade dispute with the US.”
Lindsay James, investment strategist at Quilter, added: “As uncertainty gathers pace in the global economy, the European Central Bank has looked to remain ahead of the pack in continuing to cut interest rates sooner than other developed economies.
“Now this rate cut hasn’t necessarily been tariff induced given Europe has its own economic problems, but they will certainly be playing a factor in the decision making from Christine Lagarde and her colleagues.
“What will be interesting to watch is where interest rates in Europe go from here. Clearly if the tariffs announced by President Trump cause global growth to fall more than expected then extra rate cuts may be on the cards, but the ECB is likely getting to the point where it cannot accommodate many, if any, more rate cuts.
“It all depends on the path of inflation, and with Jerome Powell warning in the US about the risk of price rises, the ECB will be walking a tightrope should tariffs produce some level of inflation on the continent.
“Germany will certainly welcome these rate cuts with its plans to loosen the fiscal purse strings and try to invigorate some sort of growth into the economy.
“The ECB has removed terminology around rates being ‘restrictive’ and as such it too is clearly wanting to stimulate growth at a time of severe economic uncertainty.
“Whether or not it can outmanoeuvre or second guess the unpredictability of the administration in the US, however, remains to be seen.”
