The European Central Bank made yet another 25-basis-point interest rate cut on Thursday as global tariff turmoil has created widespread uncertainty and spurred fears about the euro zone’s economic growth.
A rate cut was fully anticipated by markets, with an around 94% chance of a 25-basis-point trim being priced in ahead of the decision, according to LSEG data.
The cut takes the ECB’s deposit facility rate, its key rate, to 2.25%. At its highs in mid-2023 it had been at 4%.
Tariff developments in recent weeks are widely seen by analysts and economists as a key reason for the ECB to cut interest rates. Even though many of the initial duties imposed by the U.S., as well as retaliation measures, have been put on ice or eased, fears about how they could affect economic growth have been rife.
In its policy statement, the ECB said that the “outlook for growth has deteriorated owing to rising trade tensions.”
It added, “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.”
Investors will be watching out for any comments regarding tariffs in the ECB Governing Council’s statement and from the central bank’s President Christine Lagarde in her post-meeting press conference.
Market attention will also focus on whether the ECB tweaks its language around the restrictiveness of monetary policy, and if policymakers provide any clues around the hotly debated so-called neutral rate. That is the level at which interest rates neither stimulate nor restrict the economy, and are therefore held at.
While a rate cut was expected, “more importantly for markets will be the extent to which the central bank decides to communicate what it perceives to be the “neutral rate”, and whether monetary policy could turn accommodative – i.e. go below the neutral rate – in the next six to 12 months,” Julien Lafargue, chief market strategist at Barclays Private Bank, said in a note Thursday.
