ECB cuts rates amid trade war fears

The European Central Bank (ECB) cut interest rates by 25 basis points on Thursday amid a backdrop of the global market rout driven by US President Trump’s tariff scheme and a rally in the value of the euro. Policymakers have to grapple with the expected economic slowdown from the tariffs, as well as a fallout from the market volatility which is likely to affect prices. The cut—the seventh consecutive reduction—takes the ECB’s benchmark deposit facility rate to 2.25% (in mid-2023 it was 4%).

The EU, which has a €198.2 billion trade surplus with the US, is expected to face ongoing hostility from the Trump administration over its trading relationship. In March, the ECB cut its 2025 growth forecast for the eurozone to 0.9%. In Thursday’s press conference, President Christine Lagarde said the global economic outlook is clouded by "exceptional uncertainty."

“The major escalation in global trade tensions and associated uncertainties will likely lower euro area growth by dampening exports, and it may drive down investment and consumption,” she said.

More cuts likely

The market forecasts a further 75 basis-points worth of cuts over the course of this year, bringing rates to around 1.5% by December 2025.

“While the tariff picture is rapidly evolving, there is no doubt that macro volatility is increasing downside risks for economic growth in the near term,” says Orla Garvey, senior fixed income portfolio manager at Federated Hermes Limited.

In March, German lawmakers approved a €500 billion spending package that could have a big impact on the defence and infrastructure sectors in Europe’s biggest economy. However, the impact of the ramp-up in German fiscal spending will not be felt until 2026, Garvey adds.

“In contrast to the US, the deterioration in the growth outlook in Europe doesn’t come with the same upward inflationary impulse. In fact, it is likely the opposite, which will give the ECB greater confidence in its inflation forecasts and keep it on track with its cutting schedule,” she says.

Gary Skedge, head of sterling and euro liquidity strategies at Federated Hermes, points out that Lagarde expressed optimism inflation will continue to fall and hit the ECB’s 2% target. But she sounded wary about the impact that trade tensions could have on business investment and consumer confidence. Inflation in the eurozone was 2.2% in March, compared with 2.3% in February.

Importantly for the liquidity space, European banks appear in good shape. Skedge says this puts euro-denominated money market vehicles in a strong position. “The banking sector, which makes up a significant proportion of their credit, remains very healthy from a balance sheet perspective."