ECB cuts rates as trade tensions cloud growth outlook

The European Central Bank (ECB) cut interest rates by 25 basis points on Thursday, responding to rising trade tensions and a weakening economic outlook across the euro zone.

As expected by markets — with a 94% probability priced in before the decision, according to LSEG data — the ECB lowered its key deposit facility rate to 2.25%, down from 4% at its peak in mid-2023.

In its statement, the ECB pointed to “deteriorating growth prospects” due to escalating global trade tensions, warning that increased uncertainty could undermine household and business confidence while tightening financial conditions.

While some tariffs between the U.S. and other economies have been lifted or eased, fears of further disruptions persist. ECB President Christine Lagarde acknowledged during a press conference that the euro area is facing a “negative demand shock,” driven by both trade issues and fiscal and investment policies.

“The euro area economy has shown some resilience, but the overall growth outlook has weakened,” Lagarde said, adding that some of these challenges could become clearer by the ECB’s next policy meeting in June.

The ECB noted that disinflation remains on track, with inflation likely to stabilize near its 2% medium-term target. However, Lagarde emphasized that measuring the current level of monetary policy restrictiveness is “meaningless” given today’s unpredictable environment.

Further Rate Cuts Possible

Economists believe the ECB has left the door open for more cuts. Deutsche Bank’s Mark Wall said the ECB appears prepared to ease further if trade tensions persist. Wall expects another cut in June and a terminal rate of 1.5% by year-end.

This view was shared by Capital Economics’ Andrew Kenningham, who anticipates cuts at both the June and July meetings.

A Measured, ‘Insurance-Style’ Move

ING’s Carsten Brzeski described the decision as “an insurance cut Lagarde-style” — a cautious step taken in a highly uncertain environment. A larger move, he noted, might have risked market overreaction, while doing nothing could have questioned the ECB’s commitment to supporting growth.

Cautious, Data-Driven Policy Path

The ECB reaffirmed it would take a data-dependent, meeting-by-meeting approach, avoiding any pre-commitment to a specific rate path. Decisions will hinge on incoming economic and financial data, inflation trends, and how monetary policy affects the broader economy.

Following the announcement, euro zone bond yields eased slightly, reflecting market expectations for a more accommodative stance moving forward.

Looking Ahead

Despite economic headwinds, the ECB noted that the euro area likely posted growth in the first quarter of 2025. However, continued trade tensions, financial market volatility, and geopolitical uncertainties remain significant risks for the region’s economic trajectory.