ECB cuts interest rates as Trump’s tariffs bring ‘exceptional uncertainty’
The European Central Bank (ECB) cut interest rates by a quarter point in what was the first decision from a major central bank since President Donald Trump announced sweeping tariffs in a historic speech earlier this month.
The all-out global trade war, which has seen the likes of China retaliate with heavy tariffs on the US, and Trump temporarily row back on almost all of the tariffs he unveiled in early may, has put central banks on alert as the outlook on inflation became unclear.
The ECB’s policymakers unanimously decided at a meeting in Frankfurt to bring its benchmark rate down to 2.25 per cent, a source told Reuters.
It was the seventh time in a row the ECB decided to cut its benchmark rate after a peak in late 2023.
The bank said in a statement that the ongoing trade war created “exceptional uncertainty” for the future of economies part of the eurozone.
It also said the “outlook for growth has deteriorated due to rising trade tensions”.
Capital Economics’ Andrew Kenningham said the comments reflected the ECB’s more “accommodative” stance on monetary policy in the wake of Trump’s Rose Garden speech earlier this month.
“While the Governing Council remains reluctant to give any forward guidance, we think it is likely to cut rates again in June and July,” he said.
The cutting of interest rates may relieve some of the demand-side pressures from the tariff war.
Analysts correctly predicted a cut after lower inflation fell of 2.2 per cent in March eased concerns about price growth.
Trump’s ongoing trade war with China could yet have ramifications on the price of goods in the continent as cheaper goods may flood into Europe.
KPMG economist Yael Selfin suggested the tit-for-tat tariff rises between China and the US would have a downward effect on inflation.
“Commodity prices have weakened significantly in recent weeks and the fall has been accompanied by a sharp appreciation in the euro,” Selfin said.
“The outfall of the trade disruptions could create a global glut of manufactured goods, which could see goods prices fall into deflationary territory this year.”
ING’s global head of macroeconomics Carsten Brzeski said the decision came as “little surprise”.
“US tariffs and the never-ending back-and-forth have brought back growth concerns for the eurozone, clearly offsetting previous optimism stemming from the German fiscal policy U-turn, at least in the near term.
“The strengthening of the euro and the drop in energy prices have added to the disinflationary impact that the current trade tensions will have on the eurozone.
He also suggested that the ECB was not acting fast enough to cut interest rates.
“The ECB, which looked hesitant to decide between a pause and a next rate cut only a few weeks ago, is now suddenly at risk of falling behind the curve once again.
“In fact, during the Mario Draghi era, today’s meeting would have probably delivered a 50 basis point interest rate cut to support sentiment in markets and the real economy, as well as simply demonstrating the ECB’s determination to act.”