The cost of borrowing has fallen across the 20-member euro area for the third time this year after the European Central Bank cut its main interest rate to 2.25% in response to slowing growth and Donald Trump’s tariffs.
The Frankfurt-based bank cut its benchmark deposit rate by a quarter of a percentage point on Thursday, in line with economist expectations, to tackle a slowdown in the bloc and the impact from the border taxes imposed earlier this month on all EU imports into the US.
The ECB president, Christine Lagarde, said US tariffs on EU goods, which had increased from an average of 3% to 13%, were already harming the outlook for the European economy.
“The major escalation in global trade tensions and the associated uncertainty will likely lower euro area growth by dampening exports,” she said, adding that they may “drag down investment and consumption”.
Lagarde, who has overseen seven cuts, from a high of 4% last year, said it was unclear where interest rates would settle – a level known as the neutral rate – while uncertainty continued to dominate policymaking.
She told told journalists that the concept of neutral rate only worked in a shock-free world, adding: “Anybody in this room who thinks that we are in a shock-free world, I would suggest [they] have their head examined.”
In a statement after announcing the cut, the ECB’s governing council said the outlook for growth had deteriorated owing to rising trade tensions. “Increased uncertainty is likely to reduce confidence among households and firms, and the adverse and volatile market response … may further weigh on the economic outlook for the euro area,” it said.
In the meantime, all the main indicators of inflation were falling, allowing for a reduction in interest rates. The central bank said services inflation, which has proved stubbornly high in recent years, had eased markedly over recent months while wage growth was moderating, and where it remained high, companies were absorbing the extra costs in reduced profits.
Trump has imposed an extra 10% tariff on EU goods to the US, with the threat of a further 10% suspended until July. Industry-specific tariffs of 25% already apply on steel, aluminium and cars into the US, and more are threatened on pharmaceuticals and electronics imports.
Mark Wall, the chief European economist at Deutsche Bank, said the emphasis on a shock from the tariffs “implied an openness to further monetary easing”, assuming the trade shock persisted, and was “borne out in the data”.
Most City economists expect a further rate cut in June. Wall said the reductions would continue this year until they reached 1.5%, such was the probable hit to European economic growth from US tariffs.