The European Central Bank (ECB) has cut its key interest rates for the eighth time in just over a year, reducing it from 2.25% to 2%, amid warnings about continuing pressure on the eurozone from Donald Trump’s tariffs. ECB President Christine Lagarde attributed much of the uncertainty surrounding the economy to trade policies, stating that higher incomes and a “robust” employment market “will allow households to spend more” and help “make the economy more resilient to global shocks”.
The ECB’s decision comes as the eurozone economy has been sluggish, despite inflation easing across the region. The central bank expects the economy to gather pace in the medium-term, boosted by European spending on defense and infrastructure. NATO is pushing for members to commit more funding to shore up defense in Europe as Russia continues its war on Ukraine.
Tariffs and Economic Uncertainty
The US has doubled tariffs on EU steel and aluminum imported to the US from 25% to 50%, prompting threats of retaliatory taxes from the wider European Union. Trump has paused taxes on other European goods sold to the US until July 9, but a 10% tariff remains in place until then. The EU has drawn up its own list of tariffs on €21 billion worth of US goods.
Lagarde emphasized that uncertainty surrounding trade “would weigh on business investment and exports”. The ECB expects “stronger-than-expected” economic growth of 0.3% between January and March may weaken as the year goes on. Germany’s Chancellor Friedrich Merz will meet Trump in the White House to discuss tariffs and defense spending.
Global Economic Implications
The pace of the ECB’s rate cuts has drawn praise from Trump while provoking his anger at the US Federal Reserve and its chair Jerome Powell. Trump wrote on social media, “ADP NUMBER OUT!!! ‘Too Late’ Powell must now LOWER THE RATE. He is unbelievable!!! Europe has lowered NINE TIMES!” The US Fed has reduced the key interest rate three times, while the ECB has cut rates eight times in its latest cycle.
Powell noted that Trump’s tariff policies would likely “generate a rise in inflation, a slowdown in economic growth, and an increase in unemployment” if they remain in place. Official US employment statistics are due out, with economists forecasting 130,000 jobs added in May, down from 177,000 in the previous month. The unemployment rate is expected to hold steady at 4.2%.