The European Central Bank on Thursday reduced its key interest rate by 25 basis points, citing easing inflation and mounting risks to economic growth from trade tensions and business pessimism.
The move was in line with most expectations.
It marks the seventh rate cut over the past year as the ECB attempts to support the eurozone economy amid an increasingly fragile global backdrop.
The move lowers the ECB’s deposit rate to 2.25%, the lowest since early 2023.
It also reflects growing concerns within the bank over waning business confidence and the economic fallout from tariffs imposed by the United States.
“The euro area economy has been building up some resilience against global shocks, but the outlook for growth has deteriorated owing to rising trade tensions,” the central bank said in its monetary policy statement.
‘Increased uncertainty is likely to reduce confidence among households and firms’
In a notable change in language, the ECB dropped its earlier assessment that interest rates were “meaningfully less restrictive” and acknowledged that a combination of factors could now weigh more heavily on the eurozone’s economic outlook.
“Increased uncertainty is likely to reduce confidence among households and firms, and the adverse and volatile market response to the trade tensions is likely to have a tightening impact on financing conditions. These factors may further weigh on the economic outlook for the euro area,” it said.
The shift reflects the central bank’s view that current interest rate levels are now at the upper end of what it considers “neutral” — a rate neither stimulating nor constraining growth.
While this neutral range is loosely placed between 1.75% and 2.25%, policymakers have stressed that it is not a fixed benchmark.
ECB refrains from providing clear guidance while markets price in two more cuts
Despite the rate cut, the ECB offered no clear guidance on the path ahead.
Instead, it reaffirmed that future decisions would be made on a meeting-by-meeting basis, depending on economic data.
Financial markets are pricing in at least two more rate cuts in 2025, and some analysts see room for a third, particularly if US tariffs and global financial volatility further weigh on the eurozone economy.
President Christine Lagarde is expected to emphasize these risks during her press conference.
She has previously estimated that trade tensions and the resulting confidence shock could trim as much as half a percentage point from eurozone growth — a significant hit for a region already growing at modest rates.
Lagarde is also likely to note the easing of inflationary pressures since the ECB’s last meeting in March.
A stronger euro, falling energy prices, and a slowing growth outlook have all contributed to a reduced inflation threat.
She may also point out that Chinese exports could further depress global prices if US tariffs force Beijing to redirect goods to Europe and other markets.
Euro retreats from highs but holds gains
Following the ECB’s announcement, the euro edged lower toward $1.13, slipping from recent highs last seen in early 2022.
Still, the currency remains up roughly 5% against the dollar so far in April, buoyed by shifting investor sentiment and growing expectations of increased defence spending in countries like Germany.
The ECB’s next steps will be closely watched as policymakers navigate a delicate balance between stabilizing inflation and shielding the economy from external shocks.
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