To Counter Trump’s Tariff Pressure! ECB Cuts Interest Rate by 25 Basis Points as Expected

On Thursday local time, following the achievement of its inflation target and repeated blows to the economy from Trump's tariffs, the European Central Bank (ECB) cut interest rates by 25 basis points as expected, marking the eighth rate cut within a year.

Specifically, the ECB reduced the deposit facility rate by 25 basis points to 2%, while the main refinancing rate and the marginal lending rate were lowered from 2.4% and 2.65% to 2.15% and 2.4%, respectively, reaching their lowest levels since early 2023.

Following the announcement of the interest rate decision, the euro rose sharply against the US dollar in the short term before pulling back. The yield on Germany's 10-year government bonds fell by approximately 5 basis points to 2.48%, while European stock markets showed no significant fluctuations.

In its statement, the ECB said, "Inflation is currently close to the Governing Council's target of 2%. Although uncertainties surrounding trade policy are expected to weigh on business investment and exports, increasing government investments in defense and infrastructure will increasingly support medium-term economic growth."

US President Trump's tariff policies have cast a shadow over global growth, driving up the euro exchange rate and pushing down energy costs. While this is accelerating the pullback in inflation, some now fear that Europe may respond by retaliating with tariffs and increasing spending, which could further complicate the situation.

On the inflation front, the ECB expects inflation to remain at 2.0% this year and 1.6% next year, lower than its March forecast. However, the bank also noted that inflation in the eurozone faces greater uncertainty than in the past.

Additionally, the ECB revised down its economic growth forecast for 2026, projecting that the GDP of the 20 eurozone countries will grow by 1.1% next year, down from the 1.2% forecast three months ago. Nevertheless, it still expects GDP growth of 0.9% in 2025, due to stronger-than-expected economic growth in the first three months of this year.

Despite ECB President Christine Lagarde stating that risks to economic growth remain tilted to the downside, she also noted that factors such as a strong labour market, rising real incomes, and improved financing conditions are helping consumers and businesses weather the impact of a turbulent global environment.

Lagarde pointed out that despite the decline in energy costs and the recent strengthening of the euro, inflation is expected to return to near the target level by 2027.

Prospects for trade negotiations

Amid escalating geopolitical tensions, eurozone businesses and policymakers are facing increasing uncertainty. Trump's tariff policies are a major concern, as tariffs on certain industries could deal a severe blow to Europe.

Currently, most EU exports to the US face a 10% tariff, but this rate could rise to 50% in July if trade negotiations fail. German Chancellor Merz is set to meet Trump at the White House later on Thursday, with trade being one of the main topics of discussion between the two sides.

ECB officials have said that the impact of tariffs on inflation is not yet clear and may depend on whether and how the EU retaliates. The EU's retaliatory measures are currently on hold, but EU leaders have indicated that they are prepared to implement them if necessary. There are also questions about how the plans by European countries to increase defense spending will affect the economy.

During this meeting, the ECB did not pre-commit to a specific interest rate path. Irene Lauro, an economist at Schroders Investment, commented, "The ECB cut interest rates by 25 basis points today as expected, but we do not anticipate any follow-up moves next month." She added that since there have been no signs so far that tariffs are weakening the economy, they are more likely to pause the interest rate cut cycle.

However, Natasha May, global market analyst at JPMorgan Asset Management, said, "With inflationary pressures fading rapidly and growth headwinds intensifying, the case for the ECB to cut interest rates again in July is very clear."