[FRANKFURT] The European Central Bank cut interest rates for the seventh time in a year on Thursday (Apr 17), looking to prop up an already struggling eurozone economy that will take a large hit from US tariffs.
The ECB has been lowering borrowing costs as post-pandemic price pressures retreat, and recent trade-related turmoil on global markets is adding to the case for further policy easing.
“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,” the ECB said. “These factors may further weigh on the economic outlook for the euro area.”
But ECB President Christine Lagarde is unlikely to offer many clues about the future, sticking instead to her line that uncertainty remains far too great for the bank to commit to anything, and it will decide its next steps as data come in.
While US President Donald Trump has paused most tariffs, many remain in place and volatility in financial markets has already done damage to the economy.
This led the vast majority of economists polled by Reuters to expect Thursday’s cut, which lowered the rate that the ECB pays on bank deposits by 25 basis points to 2.25 per cent.
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This is the top of the 1.75 per cent-2.25 per cent range that the ECB has defined as “neutral”, neither boosting nor restricting economic activity.
Accordingly, the ECB removed a reference to interest rates being “restrictive” from its press release.
Lagarde said last month the ECB estimated that growth across the 20 countries that share the euro could fall by half a percentage point if the United States imposes a 25 per cent tariff on EU imports and the bloc retaliates, erasing about half the eurozone’s expected expansion.
But that estimate has been seen as too optimistic, particularly if a trade war wreaks havoc with investor, business and consumer confidence.
While the ECB expected a trade war to increase inflation by 50 basis points, the turmoil caused by erratic US trade policy could equally detract from it. Nearly all financial indicators impacting prices have shifted dramatically in recent weeks.
The euro has firmed 9 per cent amid the volatility and trades at an all-time high on a trade-weighted basis, energy prices are sharply lower, growth is slowing, and China, the number one target of US tariffs, could dump some of its output on Europe.
A number of investment banks have trimmed their forecasts for eurozone inflation this year, often lowering it to or below the ECB’s 2 per cent target.
“Disinflationary forces are piling up,” HSBC wrote in a note as it cut its inflation forecast to 1.9 per cent for this year and 1.8 per cent for the next.
Investors are seeing at least two more cuts this year, with some even pricing a third as growth falters. REUTERS
