The European Central Bank cut its benchmark interest rate for an eighth time, aiming to support businesses and consumers with more affordable borrowing as U.S. President Donald Trump’s trade war threatens to slow already tepid growth.
The bank’s rate-setting council cut interest rates by a quarter of a point Thursday at the bank’s skyscraper headquarters in Frankfurt. Analysts expected a cut, given the gloomier outlook for growth since Trump announced a slew of new tariffs April 2 and subsequently threatened to impose a crushing 50% tariff, or import tax, on European goods.
The bigger question remains how far the bank will go at subsequent meetings. Bank President Christine Lagarde’s remarks at a post-decision news conference will be scrutinized for hints about the bank’s outlook.
Much depends on whether trade tensions can be resolved through negotiations, the bank indicated. “A further escalation of trade tensions over the coming months would result in growth and inflation being below the baseline projections,” the bank said in its accompanying monetary policy statement “By contrast, if trade tensions were resolved with a benign outcome, growth and, to a lesser extent, inflation would be higher.”
While the trade war and the uncertainty that goes with it is holding back growth, the ECB said the economy should get additional stimulus from higher government spending on defense and infrastructure. European governments are stepping up plans for defense purchases to counter Russia and its invasion of Ukraine. The spending boosts arrive amid concern that the U.S. is no longer a fully committed ally in support of Ukraine.
U.S. Defense Secretary Pete Hegseth did not attend a recent meeting of allied nations created to organize Ukraine’s military aid. It was the first time the U.S. was not present since the group was set up three years ago. Hegseth’s predecessor, Lloyd Austin, created the group after Russia launched all-out war on Ukraine in 2022.
Given the different possible outcomes the bank said that it was “not committing to a particular rate path” for future policy meetings.
Thursday’s decision took the bank’s benchmark rate to 2%, down from a peak of 4% in 2023-24.
The bank raised rates to suppress an outbreak of inflation in 2021-23 that was triggered by Russia’s invasion of Ukraine, and by the rebound from the pandemic. But as inflation fell, the bank shifted gears toward supporting growth by lowering rates. With inflation now down to 1.9%, below the bank’s target of 2%, analysts say the bank has room to take rates even lower to support growth.
Trump announced a 20% tariff, or import tax, on goods from the European Union. He later threatened to raise the tariff to 50% after expressing dissatisfaction with the progress of trade talks with the EU's executive commission, which handles trade issues for the 27-member union. Trump and the EU’s executive commission have agreed to suspend implementation and any retaliation by the EU until July 14 as negotiators seek to reach agreement.
Trump added more disruption this week by suddenly increasing a 25% tariff on steel imports to 50% for all countries except for the U.K. The threat of even higher tariffs has raised fears that growth will underperform already modest forecasts. The EU’s executive commission lowered its growth forecast for this year to 0.9% from 1.3% on the optimistic assumption that the 20% tariff rate can be negotiated down to no more than 10%.
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