Frankfurt, Germany (AP) – The European Central Bank plans to reduce its benchmark interest rates for the eighth time, aiming to assist businesses and consumers with more affordable borrowing amid Donald Trump's Trade War, which may further hinder the already tepid growth.
The bank’s interest rate setting council decided on a quarter-point reduction on Thursday at its headquarters in Frankfurt. Analysts had anticipated cuts due to the bleak growth outlook after Trump announced several new tariffs on April 2 and subsequently threatened a substantial 50% import tax on European goods.
The pivotal question remains how far the bank will proceed in future meetings. Comments from President Christine Lagarde during the post-decision press conference will be closely analyzed for insights into the bank’s perspective.
With this latest decision, the bank’s benchmark rate has dropped to 2% from its peak of 4% in 2023-24.
Previously, the bank increased rates to tackle inflation spikes between 2021 and 2023, driven by Russia's invasion of Ukraine and the economic rebound from the pandemic. However, as inflation has subsided, the bank has shifted focus to promote growth by cutting interest rates. Currently, inflation stands at 1.9%, below the bank’s 2% target, providing room for further rate reductions to bolster economic activity.
This is a news update. Prior reports about the AP include:
Frankfurt, Germany (AP) – Declining inflation and concerns over US President Donald Trump's Trade War have contributed to a slowdown in already modest growth, paving the way for the European Central Bank to lower interest rates during its policy meeting on Thursday. This action could potentially reduce borrowing costs for consumers and businesses, thereby encouraging economic activity.
The central issue is how low interest rates can go amid uncertainties surrounding the impacts of US trade policies on European export-reliant economies, which market analysts predict could face severe consequences. President Christine Lagarde will undoubtedly be queried about the bank’s future outlook at the press conference following the decision.
This quarter-point reduction marks the eighth rate cut since June 2024, establishing the bank’s benchmark rate at 2%.
On April 2, Trump announced a 20% tariff on imports from the European Union. He later hinted at increasing tariffs to 50% after expressing dissatisfaction with trade negotiation progress with the EU. Trump and the EU Executive Committee have agreed to pause EU’s retaliatory measures until July 14 while discussions continue.
Additionally, Trump escalated confusion this week by threatening to increase 25% tariffs on steel imports to 50% for all countries except the UK.
The looming threat of higher tariffs has raised concerns that growth may fall short of already modest projections. The EU Executive Committee has adjusted its growth forecast for the year down to 0.9%, from an earlier assumption that the 20% tariff could be negotiated to below 10%.
Low inflation has bolstered the ECB’s capacity to reduce rates. With easing energy prices, inflation rates in the 20 euro-using countries dropped from 2.2% in May to 1.9%.
The ECB previously raised rates to a historic 4% to combat inflation peaking at double digits during 2021-2023. However, with inflation currently below the 2% target, there is now greater flexibility for further reductions. Lower rates lower borrowing costs and make purchases cheaper, encouraging demand for goods and potentially boosting spending and investment.
Source: apnews.com