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The European Central Bank has cut interest rates across the 20-member eurozone for the second time this year, and warned that trade war fears are hurting Europe’s economy.
The Frankfurt-based rate setter cut its benchmark deposit rate by a quarter of a percentage point to 2.5%, in line with City economist expectations, as Trump prepared to impose 25% tariffs on all goods imported from the EU, in line with similar actions taken against Canada and Mexico.
The ECB president, Christine Lagarde, blamed a “high level of trade and policy uncertainty” for a downgrade in growth this year.
There was better news on the battle against inflation, which the ECB said was moderating.
“The disinflation process is well on track,” the ECB said. “Inflation has continued to develop broadly as staff expected, and the latest projections closely align with the previous inflation outlook.”
The central bank cut its growth forecasts for this year and next year, warning that “the economy faces continued challenges”.
“The downward revisions for 2025 and 2026 reflect lower exports and ongoing weakness in investment, in part originating from high trade policy uncertainty as well as broader policy uncertainty,” the ECB said.
It now expects growth of just 0.9% in 2025, 1.2% in 2026 and 1.3% in 2027. It had previously forecast growth of 1.1% for this year, and 1.4% in 2026.
But it lifted its forecast for inflation this year, from 2.1% to 2.3%, because of higher energy prices.
After six cuts in the cost of borrowing in the last year, ECB officials are understood to be hesitant about going further while the international situation remains volatile and the recent fall in inflation could reverse.
Price pressures eased in February, as inflation fell to 2.4% from 2.5% in January, according to a flash estimate by Eurostat, and services inflation dropped to 3.7% – below 3.9% for the first time since April 2024.
However, increases in energy prices in response to the uncertainty surrounding “peace talks” to end the Russian invasion of Ukraine could upend projections that inflation will fall back to the 2% target by the first quarter of 2026.
Lagarde warned that a rise in energy prices could feed through to higher food prices, delaying an expected return of inflation to 2% next year.
The deposit rate sets the interest that banks receive when they make overnight deposits with the Eurosystem.
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The ECB also cut its main refinancing rate, paid by banks when they borrow funds from the central bank on a weekly basis, by a quarter of one percentage point, to 2.65%.
The marginal lending facility rate, charged when banks borrow overnight from the ECB, has been cut from 3.15% to 2.90%.
The ECB said its interest rate had become “meaningfully less restrictive”, signalling that further rate cuts would be modest, and possibly delayed until at least the summer, especially when the impact of previous rate cuts had yet to feed through to the wider economy.
The ECB is also under pressure to prevent a steep rise in eurozone government borrowing costs after the German chancellor-in-waiting, Friedrich Merz, said his country would “do whatever it takes” to rearm.
Merz is keen to lift a debt brake that has prevented successive German governments since the 2008 financial crash from lifting borrowing significantly.
This sparked a surge in German borrowing costs this week, and a knock-on impact on Italian and French bonds, which have risen sharply in recent days, putting pressure on Paris and Rome to make spending cuts to balance the books.
