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FRANKFURT: People walk in to the headquarters of the European Central Bank (ECB) in Frankfurt am Main, western Germany, past a giant Euro logo on April 17, 2025.- AFP
FRANKFURT: People walk in to the headquarters of the European Central Bank (ECB) in Frankfurt am Main, western Germany, past a giant Euro logo on April 17, 2025.- AFP

ECB cuts rates as US tariffs raise fears for euro-zone growth

FRANKFURT: The European Central Bank cut interest rates again Thursday amid fears that US President Donald Trump’s stop-start tariff announcements could threaten growth across the euro-zone. ECB policymakers decided to lower rates by a quarter-point, marking the central bank’s sixth consecutive cut to borrowing costs for the single-currency area. The decision brought the ECB’s benchmark deposit rate down to 2.25 percent, the lowest it has been since the beginning of 2023.

Rate-setters have slowly lowered borrowing costs in the euro-zone as inflation has drifted back towards the ECB’s two-percent target. But while inflation was headed in the right direction, “the outlook for growth has deteriorated owing to rising trade tensions”, the ECB said in a statement. The ECB had looked set to pause its cuts after its last meeting in March but the fears stirred up by Trump’s whirlwind tariff policy look to have forced its hand. Thursday’s cut “came as little surprise”, ING bank analyst Carsten Brzeski said. Having sought a “very measured” approach to gradually bring rates down, the ECB now risked “falling behind the curve once again”, Brzeski said.

Tariff confusion

Going into the meeting, ECB rate-setters will have had little idea what tariff rates would eventually apply to transatlantic trade - and what impact they could have on growth. Besides a basic 10 percent tariff rate on imports into the United States, Trump has also imposed 25 percent levies on the automotive, steel and aluminum sectors. The US president spooked global markets with the unveiling of swingeing “Liberation Day” tariffs at the beginning of April, before promptly pausing higher duties for dozens of countries, including the EU, for 90 days.

The White House has also opened probes into chips and pharmaceuticals that could lead to more industry-specific tariffs that could impact the euro-zone. The ECB said it was facing “exceptional uncertainty” and would follow a “data-dependent and meeting-by-meeting” approach as it went forward. The uncertainty was “likely to reduce confidence among households and firms”, the central bank said, while market tensions would lead to tighter financing conditions.

In that context, another cut to relieve stress on households and businesses and support the economy seemed “straightforward”, according to analysts at Italian lender UniCredit. The ramifications of higher US tariffs would “outweigh the positive impulse” given by massive planned spending in the euro-zone’s biggest member, Germany, they said. The incoming government in Berlin led by Friedrich Merz has lined up hundreds of billions of euros in extra cash for defense and infrastructure, providing a boost that could be felt across Europe.

But Germany’s stimulus measures would only “kick in” in 2026, while the impact of Trump’s shake-up of the global trading system would be felt almost immediately, the UniCredit analysts warned. As for the prices of goods and services, US tariffs made a “further decline in inflation in the euro-zone even more likely”, said Robert Greil, a strategist at private bank Merck Finck. Inflation among the 20 members of the euro-zone has come down significantly from the double-digit highs seen in late 2022 and sat at 2.2 percent in March. The single currency has gained in strength relative to the dollar, which should make imports cheaper going forward, while hefty US tariffs on China could see cheap goods diverted to Europe, Greil said. 

Observers will listen carefully to ECB president Christine Lagarde’s remarks after the rates announcement for a hint of how the ECB may respond going forward.

Lagarde last week signaled policymakers’ willingness to support the euro-zone in a more critical scenario, where Trump’s tariff policy caused a threat to financial stability. The ECB “is always ready to use the instruments that it has available”, Lagarde said in Warsaw. — AFP

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