The European Central Bank has decided to cut interest rates for the seventh time since June last year, as currently growing global trade tensions and significant uncertainty in this area threaten the prospects for the economic recovery of the region.
The deposit rate has been reduced by a quarter of a percentage point. Currently, this figure is 2.25%. It is worth noting that this reading corresponds to the preliminary forecasts of the majority of experts interviewed by the media. The main refinancing operations rate after the decision of the European Central Bank to lower the cost of borrowing is 2.4%. The marginal lending facility decreased to 2.65%. It is worth clarifying that the mentioned indicators will take effect on April 23.
A noteworthy circumstance in this case is that in the official statement of the European financial regulator, monetary policy is not characterized as restrictive.
Markets have raised their bets that the European Central Bank will continue cutting interest rates. This expectation is based on the fact that officials of the financial institution noted that Europe is currently facing difficulties. It is worth noting that the external economic environment is unfavorable for the vast majority of countries in the world. This situation is related to the outbreak of a trade war, which was catalyzed by the increase in tariffs on imported goods by the administration of the President of the United States, Donald Trump, and subsequent retaliatory measures by some governments. The mentioned measures imposed by Washington affected, among others, Brussels.
On Thursday, April 17, the president of the European Central Bank, Christine Lagarde, during a conversation with media representatives in Frankfurt, said that the downside risks to economic growth had increased. Also in this context, she separately noted that it will take time for all the consequences of the United States tariffs to become clear.
Christine Lagarde said that a major escalation in global trade tensions and the associated uncertainty are likely to be the reasons for the slowdown in the eurozone economy by dampening exports. Also, according to her, the mentioned state of affairs may have a downward impact on investment and consumption. Moreover, Christine Lagarde said that the deterioration of sentiment in financial markets may lead to a tightening of financing conditions.
German bonds erased losses. The yield on 10-year bonds for the day showed a moderate decrease, amounting to 2.5%. The euro continued the previous decline. The currency fell 0.6% to $1.336. Currently, the markets are dominated by the expectation that the European Central Bank will make three more interest rate cuts by the end of 2025.
Mark Wall, chief European economist at Deutsche Bank, said that the forward-looking view on the economy implies an expected shock from tariffs, and the characterization of exceptional uncertainty implies an openness to further monetary easing — assuming the trade shock persists and is borne out in the data. This expert expects that the European Central Bank will lower the cost of borrowing in June. Also, according to Mark Wall, by the end of 2025, the deposit rate will be 1.5%.
According to media reports, a few weeks ago, officials of the European Central Bank considered the possibility of a pause in the process of easing monetary policy. The financial regulator finally abandoned this potential plan after Donald Trump announced sweeping tariffs against trading partners in the first half of the current month. Against the background of the mentioned actions of Washington, the European Central Bank decided to continue to adhere to the concept of consistent lowering of borrowing costs.
Also, as noted by the media, the prospect of another interest rate cut has become more interesting for officials of the mentioned financial institution, as inflation in the eurozone continues to approach their target of 2%. The corresponding process is observed against the background of circumstances such as the fall of energy costs and a plunge in confidence indicators. The unexpected gain in the euro, which was recorded in the current month, elevated the common currency to a three-year high against the dollar.
Christine Lagarde said that investor sentiment turned out to be more resilient towards the eurozone than towards other regions. She also repeated the thesis that the European Central Bank does not target a particular exchange rate.
According to media reports, the new wording contained in the ECB’s official statement indicates that officials of this financial institution consider monetary policy to be within the range of estimates for neutral. In the relevant context, it means a level that does not stimulate and at the same time does not limit economic activity. Christine Lagarde said that the concept of a neutral rate is no longer useful. Besides, she characterized the mentioned concept as meaningless given the current state of uncertainty.
Inflation in the eurozone is already on the back foot. At the same time, there are currently significant concerns that tariffs from the United States could cancel out hopes for a revival of the economy of the mentioned region. If this negative scenario is implemented, there is a high probability that dragging consumer-price growth below the target will begin in the eurozone.
It is worth mentioning that Donald Trump has announced a 90-day pause in tariff increases. During the mentioned period, levies of 10% will apply to European goods imported into the United States. At the same time, there is currently no understanding of what will happen after that. It is possible that before the end of the 90-day pause, Brussels and Washington will be able to reach certain agreements on the normalization of economic cooperation. At the same time, it is no less realistic that the eurozone will face higher tariffs after a period of 10% levies.
According to media reports, Brussels and Washington have so far failed to make significant progress in overcoming trade differences. In this context, journalists draw attention to the fact that Donald Trump administration officials have stated that most of the tariffs that have been imposed on the European Union will not be removed. It is possible that the final trade reality will turn out to be more favorable for Brussels, but this is just one of many non-guaranteed probabilities.
This week, European Union trade chief Maros Sefcovic met for about two hours with US Commerce Secretary Howard Lutnick and Trade Representative Jamieson Greer in Washington. After this meeting, there was not even any hint of what kind of configuration of economic ties between the two shores of the Atlantic Ocean would form in the foreseeable future. The lack of specifics probably indicates that the parties were unable to reach meaningful agreements. Negotiations between the United States and the European Union will continue, but the outcome of this process is still shrouded in a fog of mystery, against which a high level of uncertainty remains. This factor is a source of significant pressure on investor and consumer sentiment. Also, uncertainty cannot be a favorable context for economic growth prospects.
According to media reports, citing insiders who spoke to reporters on condition of anonymity, US officials signaled in a so-called behind-the-scenes format that the 20% reciprocal tariffs against the European Union, which were reduced to 10% for 90 days, would not be removed outright. Moreover, the mentioned Washington plans concern levies targeting sectors such as cars and metals.
This month, Donald Trump announced widespread tariffs on imported goods as part of his drive to reorder the global trading system, bring manufacturing jobs back to the United States, and raise revenue to pay for a tax-cut extension. The levies from the US presidential administration cover European products totaling approximately 380 billion euros ($431 billion).
Last week, the European Union agreed to delay for 90 days duties on goods imported from the United States, which are countermeasures in response to Donald Trump’s levies on steel and aluminum from the EU. Brussels announced a pause after the US president made a similar decision.
The European Union said its countermeasures cover goods from the United States totaling approximately 21 billion euros. These tariffs will come into force if negotiations between Washington and Brussels do not lead to a positive result. According to media reports, the European Union is already considering expanding countermeasures against the United States in case of a negative scenario. At the same time, Brussels is seeking to strengthen trade ties with other countries to diversify its foreign economic activity, which relies heavily on cooperation with Washington.
Negotiations are continuing, and in the meantime, the trade war is becoming an increasingly obvious fact of reality. The high level of uncertainty is putting pressure on central banks around the world. It is extremely difficult for the financial regulator to form a strategy of action against the background of a lack of understanding of how the current state of affairs will be transformed in the future. For example, the Federal Reserve System, as noted by the media, is highly likely to pause in the context of monetary policy-related actions and prefer to wait for more clarity. Fed Chairman Jerome Powell said this week that a weakening economy and elevated inflation could bring the United States central bank’s dual goals of price stability and maximum employment into conflict.
It is also worth noting that within the framework of the trade war, the highest level of tension is observed in the context of the confrontation between Beijing and Washington. According to media reports, against this background, it is likely that goods from China will be supplied to the European Union at discounted prices. Beijing and Brussels are not allies, but the new configuration of global economic reality that is currently taking shape may contribute to the establishment of alliances that in the past seemed impossible or at least unlikely.
The March data confirmed the statements of officials of the European Central Bank that disinflation is on track. During the mentioned period, prices in the eurozone increased by 2.2% year-on-year. Inflation in the service sector decreased from 3.7% to 3.5% last month. This is because wage pressure is abated.
Christine Lagarde said that the growing disruptions in global trade are adding more uncertainty. In this context, she separately noted that the fall in global energy prices and the appreciation of the euro could put further downward pressure on inflation. According to her, this may be reinforced by a decrease in demand for eurozone exports due to higher tariffs and a rerouting of exports into the euro area from countries with overcapacity.
Economists interviewed by the media currently hold the view that the European Central Bank will make another decision on cutting interest rates in June. They also expect that after the June move, the deposit rate will remain at the 2% mark at least until the end of next year.
At the same time, Goldman Sachs, Deutsche Bank, and Bank of America forecast a deeper lowering of borrowing costs in the eurozone against the background of an unstable situation characterized by a lack of even minimal certainty.
It is also worth noting separately that the actions of the European Central Bank in the context of making changes to monetary policy will largely depend on the results of negotiations between Brussels and Washington on the normalization of trade cooperation by easing tariff conditions for the implementation of this process. If the damage from US levies increases and scales, the financial regulator is likely to lower the cost of borrowing several times.
According to media reports, currently, most officials of the European Central Bank, in commenting on the prospects for further interest rate cuts, make abstract statements in certain sense that do not contain any specifics or unambiguous signals about the most likely actions of a financial institution in the context of monetary policy. This is as natural rhetoric as possible against the background of excessive uncertainty, which is actually the main feature of the current historical moment in terms of its content in the global economic dimension.
Apart from the lack of clarity on the impact of the trade war, European Central Bank officials have yet to calculate the effects of large-scale financial injections into infrastructure in Germany and increased military outlays across the region in the coming years.
Christine Lagarde said that currently, the actions of the financial regulator should depend on data more than ever before. She also noted that the European Central Bank should rely on safe, reliable data. It is worth noting that the financial regulator has long been following an approach that stipulates that decision-making regarding the cost of borrowing is possible only after receiving up-to-date information about the economic situation.
ING economists predict that the growth of gross domestic product (GDP) in the eurozone will slow down in the second and third quarters of 2025, taking into account the current geopolitical risks. They expect that the increase in the mentioned indicator for the current year will be only 0.5%. It is worth mentioning that economic growth in the eurozone reached 0.9% in 2024.
ING chief economist Peter Vanden Houte stated that with Germany’s planned expansionary budget, improvement is still likely in 2026, but due to a weaker carry-over effect, the company has also reduced next year’s growth forecast to 1.1%, down from 1.4%. At the same time, the expert noted that projections are highly uncertain due to the changing nature of Donald Trump’s trade policies.
European stock markets pared losses against the backdrop of the financial regulator’s decision to cut interest rates. The pan-European Stoxx 600 index provisionally closed 0.1% lower. Germany’s DAX and France’s CAC 40 fell by 0.5%.
