ECB Cuts Interest Rates

FRANKFURT (Reuters) – The European Central Bank cut interest rates as expected on Thursday, easing for the seventh time in the past year due to U.S. tariffs and faltering business confidence affecting already weak economic growth.

Arguing that inflation is progressing towards the 2% target, the central bank for the 20 nations sharing the euro reduced its deposit rate by 25 basis points to 2.25%, aligning with economists’ expectations surveyed by Reuters.

It also modified its language, dropping a previous assessment that interest rates are ‘meaningfully less restrictive’, instead stating that several factors may now weigh on growth.

‘Increased uncertainty is likely to reduce confidence among households and firms, and the adverse and volatile market response to trade tensions may tighten financing conditions,’ the ECB stated.

These factors could further impact the economic outlook for the euro area, according to the ECB’s announcement.

The adjustment arrives as interest rates currently sit at the upper end of the ECB’s ‘neutral rate’, a level that neither restricts nor stimulates economic growth. Previously, the bank has defined this range as 1.75% to 2.25%, though policymakers have minimized its importance, claiming it is conceptually significant but not essential for daily policymaking.

Nonetheless, the bank maintained its earlier guidance that the disinflation process is progressing well.

Financial markets anticipate at least two additional rate cuts from the ECB this year, with some expecting a third due to financial market volatility, tariffs, and economic uncertainty potentially weakening growth and consequently inflation.

However, the ECB provided little indication of future decisions, reiterating its standard that subsequent actions will depend on incoming data, adhering to a meeting-by-meeting policy.

Meanwhile, Lagarde, who will address a news conference at 1245 GMT, is likely to mention the large economic growth hit facing the bloc. Even with an eventual trade deal, the damage to confidence will significantly impact the economy.

She previously predicted a growth decrease of up to 0.5 percentage points, which could eliminate half of the bloc’s expected expansion.

Lagarde is also expected to indicate that inflation pressures have significantly eased since the ECB’s March meeting, due to a notably stronger euro, a steep decline in energy prices, and diminished growth prospects.

Furthermore, she might argue that substantial U.S. tariffs on China could compel Beijing to offload goods on other markets, potentially driving prices down and leading to faster-than-anticipated declines in inflation.