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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.
Thursdayโs unanimous decision by the ECBโs rate-setters, which brings borrowing costs in the currency bloc to their lowest in more than two years, had been widely expected after Trumpโs announcement of sweeping tariffs on most of the USโs trading partners on April 2.ย
โThe outlook for growth has deteriorated owing to rising trade tensions,โ the ECB said in comments that accompanied the rate decision. It added that โthe adverse and volatile market response to the trade tensions is likely to have a tightening impact on financing conditionsโ.
ECB President Christine Lagarde highlighted the โexceptional uncertaintyโ confronting the economy.
โEuro-area exporters face new barriers to trade although their scope remains unclear,โ she said, adding that โdisruption to international commerce, financial market tensions and geopolitical uncertainty are weighing on business investmentโ.
Ahead of the decision, Trump compared the ECBโs rate-cutting record with the US Federal Reserve, which kept rates on hold at its last meeting in March.ย
Trump said Fed chair Jay Powell, who warned on Wednesday of the tariffsโ impact on US growth and inflation, was โalways TOO LATE AND WRONGโ and his โtermination cannot come fast enough!โ
The ECBโs 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, and pushed up the chance of a third cut to around 50/50, according to levels implied by swaps markets.
The euro was little changed at $1.135 immediately after the cut.
Lagarde said that the โincreasing global trade disruptionsโ also increased uncertainty for inflation.
Lagarde said that, while the ECB knew the US tariffs were โa negative
demand shockโ with โsome impact on growthโ, the impact on inflation would only become clearer over the course of time.
On the one hand, she said, lower energy prices, a stronger euro and increased imports from China could drive inflation down. But, she added, fragmenting supply chains could also increase upward pressure on prices, as could higher government spending on defence and infrastructure.
Trump performed a partial U-turn last week, delaying his full โreciprocal tariffsโ 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 โ its sixth consecutive reduction.
Inflation edged down last month to 2.2 per cent โ marginally above the ECBโs 2 per cent target โ as service prices rose at their slowest pace for almost three years.
Economists say inflation could be driven further down by this monthโs 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 Trumpโs trade policy, at least in part.ย
But the increase in debt-funded spending in Germany and elsewhere in the Eurozone could prove an inflationary pressure.
