ECB cuts benchmark interest rate by quarter point as Trump tariffs threaten economy

Key Points

• The European Central Bank is widely expected to cut interest rates at its upcoming meeting as lower inflation and fears that President Trump’s trade war could slow growth clear the way for cheaper borrowing.
• A quarter-point rate cut would mark the eighth reduction since June 2024, bringing the ECB’s benchmark rate down to 2%.
• President Trump’s imposition of a 20% tariff on EU goods (with threats to raise it to 50%) and the sudden increase of a 25% steel tariff to 50% have prompted the EU to lower its 2024 growth forecast from 1.3% to 0.9%.
• Eurozone annual inflation fell to 1.9% in May from 2.2% in April, below the ECB’s 2% target and giving the bank room to ease monetary policy after rates peaked at 4%.

FRANKFURT, Germany (AP) — The European Central Bank cut its benchmark interest rate for an eighth time, aiming to support businesses and consumers with more affordable borrowing as U.S. President Donald Trump’s trade war threatens to slow already tepid growth.

The bank’s rate-setting council cut interest rates by a quarter of a point Thursday at the bank’s skyscraper headquarters in Frankfurt. Analysts expected a cut, given the gloomier outlook for growth since Trump announced a slew of new tariffs April 2 and subsequently threatened to impose a crushing 50% tariff, or import tax, on European goods.

The bigger question remains how far the bank will go at subsequent meetings. Bank President Christine Lagarde indicated at a post-decision news conference that much depends on whether trade tensions with the U.S. can be resolved.

“A further escalation in global trade tensions and associated uncertainties could lower euro area growth by dampening exports and dragging down investment and consumption,” Lagarde said. “By contrast, if trade and geopolitical tensions were resolved swiftly, this could lift sentiment and spur activity. A further increase in defense and infrastructure spending, together with productivity enhancing reforms, would also add to growth.”

While the trade war and the uncertainty that goes with it is holding back growth, the ECB said the economy should get additional stimulus from higher government spending on defense and infrastructure. European governments are stepping up plans for defense purchases to counter Russia and its invasion of Ukraine. The spending boosts arrive amid concern that the U.S. is no longer a fully committed ally in support of Ukraine.

Given the level of uncertainty, Lagarde said, the bank was “not committing to a particular rate path” for future policy meetings.

Thursday’s decision took the bank’s benchmark rate to 2%, down from a peak of 4% in 2023-24.

Lagarde also addressed a journalist's question about a report in the Financial Times that she had discussed leaving her post before the end of her term to become head of the World Economic Forum in Davos, Switzerland. “I can very firmly tell you that I have always been, and am, fully determined to deliver on my mission, and I’m determined to complete my term." she said. "So I regret to tell you that you’re not about to see the back of me.” Lagarde’s eight-year term ends October 31, 2027.

The bank raised rates to suppress an outbreak of inflation in 2021-23 that was triggered by Russia’s invasion of Ukraine, and by the rebound from the pandemic. But as inflation fell, the bank shifted gears toward supporting growth by lowering rates. With inflation now down to 1.9%, below the bank’s target of 2%, analysts say the bank has room to take rates even lower to support growth.

Trump announced a 20% tariff, or import tax, on goods from the European Union. He later threatened to raise the tariff to 50% after expressing dissatisfaction with the progress of trade talks with the EU's executive commission, which handles trade issues for the 27-member union. Trump and the EU’s executive commission have agreed to suspend implementation and any retaliation by the EU until July 14 as negotiators seek to reach agreement.

Trump added more disruption this week by suddenly increasing a 25% tariff on steel imports to 50% for all countries except for the U.K.

The threat of even higher tariffs has raised fears that growth will underperform already modest forecasts. The EU’s executive commission lowered its growth forecast for this year to 0.9% from 1.3% on the optimistic assumption that the 20% tariff rate can be negotiated down to no more than 10%.