The European Central Bank (ECB) has cut interest rates by 25 basis points, lowering its benchmark deposit rate to 2.25%, amid what it described as “exceptional uncertainty” stemming from escalating global trade tensions—chiefly those triggered by U.S. President Donald Trump’s tariff policies.
It marks the ECB’s seventh rate cut since mid-2023 and comes as growth across the eurozone slows and inflation continues to ease. The move, widely expected by markets, is intended to shore up the bloc’s economy as policymakers grapple with what ECB President Christine Lagarde called “a negative demand shock.”
“The major escalation in global trade tensions and the associated uncertainty will likely lower euro area growth by dampening exports,” Lagarde said at a press conference on Thursday. “And it may drag down investment and consumption.”
Tariff turmoil reshapes ECB priorities
Trump’s abrupt announcement earlier this month of broad-based tariffs on global imports—later paused for 90 days for most countries—has sent tremors through financial markets and cast a shadow over global supply chains. The EU currently faces a 20% tariff on exports to the U.S., up from 3%, with more duties threatened on cars, pharmaceuticals, and electronics.
Lagarde noted that while some of the tariffs were paused, the “cloud of unpredictability” surrounding negotiations has already tightened financing conditions and weakened household and business confidence. She warned that the full impact of the tariffs would likely take time to become clear, and ECB policy would remain “data-dependent and meeting-by-meeting.”
Growth concerns outweigh inflation
Although the eurozone economy is showing some signs of resilience—with estimated growth of 0.2% in Q1 2025—rising trade barriers are now seen as a more immediate threat than inflation, which has been drifting toward the ECB’s 2% target. Eurozone inflation stood at 2.2% in March, down from its 2022–2023 peaks, while core inflation eased from 2.6% to 2.4%.
Lagarde said the disinflation process is “well on track”, with underlying inflation expected to stabilise around the 2% target. She also confirmed that the decision to cut rates had been unanimous among ECB policymakers, though she ruled out larger cuts for now.
“Today’s cut won’t do any harm,” said ING’s Carsten Brzeski, calling it “an insurance cut Lagarde-style.” He added that leaving rates unchanged might have raised doubts about the ECB’s willingness to support growth in the face of global headwinds.
From ‘restrictive’ to ‘appropriate’
Notably, the ECB dropped language describing monetary policy as “restrictive,” a subtle but important shift in signalling. Lagarde dismissed efforts to define a “neutral rate” as “meaningless” in the current environment.
“Anybody in this room who thinks we are in a shock-free world, I would suggest they have their head examined,” she said.
Economists interpreted the language changes as a sign the ECB could be open to further easing. Deutsche Bank’s Mark Wall now expects another rate cut in June and a terminal rate of 1.5% by year-end. Capital Economics’ Andrew Kenningham also forecast rate cuts in both June and July.
Geopolitical and fiscal crosswinds
While the ECB’s actions are aimed at cushioning growth, new fiscal dynamics could complicate its trajectory. Germany’s incoming government, under Chancellor Friedrich Merz, has pledged hundreds of billions in spending on defence and infrastructure, which could provide a much-needed boost to manufacturing—but may also stoke inflation down the track.
For now, the ECB remains cautious. Lagarde said the central bank would need to be “agile” in response to unfolding developments and gave little guidance beyond reaffirming its commitment to “meeting-by-meeting” decision-making.
Markets react with restraint
Markets responded calmly to the rate cut, with eurozone bond yields pulling back slightly. Germany’s 10-year yield slipped below the flatline, and European stock indices pared early losses. The pan-European Stoxx 600 closed just 0.1% lower, while France’s CAC 40 and Germany’s DAX fell 0.5%.
The ECB’s next policy meeting is in June, by which point more clarity may emerge on trade negotiations, inflation trends, and the full impact of fiscal stimulus. But as Lagarde concluded:
“We have to stand ready for the unpredictable.”