The European Central Bank cut its key interest rate by a quarter percentage point for the seventh consecutive time on Thursday as fears of a trade war with the U.S. overshadowed lingering inflation concerns.
The move brings the ECB’s benchmark interest rate, which is used to determine the accessibility of credit to consumers and businesses in the eurozone, to 2.25 percent, its lowest since November 2022, as it seeks to shore up borrowing in the economy and boost growth.
“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 Bank said in a statement.
The decision comes after extraordinary market volatility last week following U.S. President Donald Trump’s announcement of 10 percent across-the-board tariffs on all trading partners, as well as 25 percent tariffs on aluminum, automobiles, and steel.
The prospect of an all-out global trade war has severely dampened policymakers’ hopes for growth in the bloc, whose trade is closely intertwined with that of the U.S.
Even with the quarter-point cut, increased uncertainty was likely to “reduce confidence among households and firms,” the ECB said, adding that the “adverse and volatile market response to the trade tensions” would have a tightening effect on credit. This echoed analysis from the Bank’s regular bank lending survey, which was out earlier this week.
The Bank also changed the language from its March meeting to emphasize growing unease over the economy, swapping out “rising uncertainty” for “exceptional uncertainty.” On top of that, it reiterated its readiness to use emergency bond-buying tools to support the economy in the event of an economic crisis.
Earlier this month, ECB President Christine Lagarde suggested that the first year of heightened trading restrictions could knock 0.3 percent off eurozone gross domestic product. Bundesbank chief Joachim Nagel was more blunt, suggesting that the bloc’s prospects had “massively deteriorated,” despite a planned surge in spending on defense at the EU level and in national capitals.
The ECB had raised rates from 0 percent to 4.5 percent between July 2022 and September 2023 to fight inflation fueled by the pandemic and Russia’s invasion of Ukraine.
Before Trump’s sweeping announcement, there had been ongoing doubts among ECB rate-setters that inflation had been fully beaten. Those fears, however, have since been overshadowed by the implications of the U.S. trade war.
Central Bank of Malta chief Alexander Demarco suggested to POLITICO earlier this month that tariffs would likely have a “deflationary” impact, reviving the old pre-pandemic dynamic of low interest rates and stagnation in the bloc.
After a brief uptick, inflation has begun to slow again, growing by 2.2 percent in March, down from 2.3 percent the month before. The ECB again acknowledged Thursday that inflation was “on track” to meet the Bank’s 2 percent target.
The swift downturn over the past month in energy prices, a key contributor to consumer price growth, has also upended policymakers’ worries around inflation. The surprising resilience of the euro against the dollar, which has shed value as investors flee American assets, is also likely to make imports cheaper, while making European exports less competitive and further hurting growth.
This story has been updated.
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