ECB cuts interest rates again amid tariff turmoil

The European Central Bank (ECB) lowered borrowing costs by a further quarter point – 0.25 of a percentage point – on Thursday as the market turmoil from US tariffs overtook inflation as the chief concern.

With ECB president Christine Lagarde warning about a “major escalation in global trade tensions” and increased “downside risks to growth”, Frankfurt policymakers cut interest rates for seventh time in less than 12 months, bringing the bank’s benchmark deposit rate down to 2.25 per cent from 4 per cent.

With inflation across the bloc continuing to moderate – it slowed to 2.2 per cent in March – the focus has switched from price growth to Europe’s flagging economy and the looming impact of US tariffs.

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The ECB’s latest move will provide a little relief for mortgage borrowers here, but it comes at a time of deep uncertainty for the global economy.

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“Downside risks to economic growth have increased,” Ms Lagarde told reporters in Frankfurt, indicating it would take time for the full consequences of US tariffs to materialise.

“The major escalation in global trade tensions and associated uncertainties will likely lower euro-area growth by dampening exports, and it may drag down investment and consumption. Deteriorating financial-market sentiment could lead to tighter financing conditions,” she said

Although Donald Trump has paused most tariffs, many remain in place. Volatility in financial markets has complicated the path for interest rates.

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Markets are pricing in further rate cuts this year particularly if the fallout from tariffs proves bigger than expected. The new 2.25 per cent rate is at the top of the range which the ECB considers neutral, neither boosting nor inhibiting growth.

Hence the bank dropped the word “restrictive” from its statement.

With inflation in retreat, the fear now is that US tariffs dampen recovery in the euro zone, potentially dragging price growth below the ECB’s 2 per cent target.

Even with Mr Trump’s “Liberation Day” reciprocal tariffs on pause, EU products face 10 per cent tariffs for 90 days, with no firm indication on what happens beyond that.

On the outlook for inflation, the ECB said: “The disinflation process is well on track. Inflation has continued to develop as staff expected, with both headline and core inflation declining in March. Services inflation has also eased markedly over recent months.”

Davy investment strategist Stephen Grissing said: “Following the ECB’s March meeting, there was growing anticipation of a pause in the rate-cutting cycle, especially after Germany’s significant fiscal measures aimed at stimulating economic growth.

“However the situation took a turn due to the tariff announcements on ‘Liberation Day’, which has increased risks to the euro zone’s economic outlook. Consequently, the decision to pause rate cuts at the April meeting was taken out of the hands of the ECB.”

Separately the US president has criticised Federal Reserve chairman Jerome Powell, saying his “termination cannot come fast enough!”.

This was after Mr Powell in a speech on Wednesday warned that US tariffs on about 60 countries would increase domestic prices and reduce hiring, presenting a “challenging scenario” for the US central bank by putting its two main goals – stable inflation and a healthy labour market – in tension.

Recent Eurostat data showed that inflation in the euro area rose at an annual rate of 2.2 per cent in March, compared with 2.3 per cent the month before. A measure of core inflation, which excludes volatile items such as petrol and food, dropped from 2.6 per cent to 2.4 per cent in the same period.

Meanwhile, uncertainty over global trade policies is “off the charts”, the head of the International Monetary Fund (IMF) has warned, saying Trump’s tariffs were set to hit global growth, push up prices and potentially play havoc with financial markets.

Kristalina Georgieva said on Thursday that the continuing “reboot of the global trading system” by the US, the fund’s biggest shareholder, would lead to “notable markdowns” in growth estimates. While the IMF is expected next week to raise its forecasts for price pressures, it will stop short of predicting that the US president’s policies will push the global economy into an outright recession.

“Financial markets volatility is up. And trade policy uncertainty is literally off the charts,” she said.