FRANKFURT: The European Central Bank cut interest rates for the seventh time in a year on Thursday, looking to prop up a struggling euro zone economy that is facing further pressure from U.S. President Donald Trump’s trade tariffs.
The ECB has taken borrowing costs to their lowest level since late 2022 as the sharp post-pandemic inflation spike has eased, and the fast-moving changes to trade policies bolster the case for further concern.
“The economic outlook is clouded by exceptional uncertainty,” Lagarde told a press conference after policymakers meeting in Frankfurt agreed unanimously to cut the ECB’s benchmark rate by 25 basis points to 2.25%.
The bank’s statement had warned the situation could weigh on the euro zone economy although it removed a reference to interest rates being “restrictive” – a phrase viewed as shorthand for further rate cuts ahead.
Lagarde said that with so much up in the air the bank needed to stay firmly in the mode of making decisions on a meeting-by-meeting basis.
“It will be a question of agility in the face of what we are seeing,” she said. “More than ever now we need to be data-dependent.”
While Trump has paused most tariffs for the time being, many remain in place and volatility in financial markets has already done damage to the economy.
Lagarde said the ECB would not have full clarity by its next meeting in early June as that was before the 90-day freeze Trump has put on his tariffs – which were set at 20% for the European Union – elapses.
ECB warns about financial risk coming from shadow banks
The recent turmoil had led the vast majority of economists polled by Reuters to expect Thursday’s cut in the ECB’s deposit rate to 2.25% – the top of a 1.75%-2.25% range it has defined as “neutral”, neither boosting nor restricting economic activity.
Tariff hit
Lagarde said last month the ECB estimated that growth across the 20 countries that share the euro could fall by half a percentage point if the United States imposes a 25% tariff on EU imports and the bloc retaliates, erasing about half the euro zone’s expected expansion.
But that estimate has been seen as too optimistic, particularly if a trade war wreaks havoc with investor, business and consumer confidence.
While the ECB expected a trade war to increase inflation by 50 basis points, the turmoil caused by erratic U.S. trade policy could equally detract from it. Nearly all financial indicators impacting prices have shifted dramatically in recent weeks.
“I cannot tell you if we are at peak uncertainty,” Lagarde said on Thursday. “We have to stand ready for the unpredictable.”
The euro has firmed 9% amid the volatility and trades at an all-time high on a trade-weighted basis, energy prices are sharply lower, growth is slowing, and China, the number one target of U.S. tariffs, could dump some of its output on Europe.
A number of investment banks have trimmed their forecasts for euro zone inflation this year, often lowering it to or below the ECB’s 2% target.
“Disinflationary forces are piling up,” HSBC wrote in a note as it cut its inflation forecast to 1.9% for this year and 1.8% for the next.
Ahead of the meeting investors were seeing at least two more cuts this year with some even pricing a third as growth falters.
Lagarde also addressed the sharp rise in the euro, saying that it could put downward pressure on inflation.
American Dollar Exchange Rate