ECB Cuts Rates, Forecasts Deteriorating Growth on Trade War

The European Central Bank cut its key interest rate by another 0.25 percentage points to 2.25% on Thursday amid an uncertain economic outlook as the looming trade war escalation spooks investors. The move had been widely expected.

This marks the seventh cut to the eurozone deposit rate in this easing cycle. The ECB is the only major central bank to have cut rates in April. Its counterparts in the United States, United Kingdom, Japan, Sweden, and Norway will announce their next policy decisions in early May.

“The disinflation process is well on track,” the ECB said in its press release. Services inflation has eased markedly over recent months, and most measures of underlying inflation suggest inflation will settle around the bank’s 2% target.

“The Outlook for Growth Has Deteriorated”

The ECB said: “The euro-area economy has been building up some resilience against global shocks, but the outlook for growth has deteriorated owing to rising trade tensions. Increased uncertainty is likely to reduce confidence among households and firms, and the adverse and volatile market response to the trade tensions is likely to have a tightening impact on financing conditions. These factors may further weigh on the economic outlook for the euro area.”

With its key rate approaching the neutral range, the ECB also dropped the phrase “monetary policy is becoming meaningfully less restrictive” from its statement.

According to Michael Field, chief European market strategist at Morningstar, “Rate cuts had been expected this year, but the recent escalation of the trade war with the US has expedited the need to bolster the economy. Prior to April 2, the ECB had been on a pretty clear trajectory of future rate cuts, with the deposit rate nearing the desired level. Recent events have thrown us into uncharted territory, however. Tariffs could weaken fragile European growth, but could also ignite inflation across the region—two situations that require entirely different responses from the ECB with regard to interest rate changes.”

Key ECB Interest Rates

As of April 23, the three ECB key interest rates will be:

• Deposit facility rate: 2.25%
• Main refinancing rate: 2.40%
• Marginal lending facility: 2.65%

The ECB began its rate-cutting cycle in June 2024 and cut again in September, October, December, January, and March, bringing its key rate down by 1.5 percentage points in total.

Trump Tariffs Threaten Eurozone Growth

Tariffs are widely expected to dampen the euro area’s growth. In its March forecast, ECB staff had already revised down their projections to 0.9% for 2025, 1.2% for 2026, and 1.3% for 2027. Indicators like the Sentix Eurozone Sentiment Index and HCOB eurozone manufacturing PMIs have fallen recently, and economists expect the impact to appear in hard data from May onward.

Last week, UBS downgraded its eurozone growth outlook to 0.5% from 0.9% for 2025 and to 0.8% from 1.1% in 2026. Still, the bank says higher EU and German fiscal spending is expected to spark a recovery by 2027. Germany’s incoming coalition government has agreed on a multi-billion-euro stimulus package, and analysts believe the country may benefit disproportionately compared with its eurozone peers.

What do Tariffs Mean for Eurozone Inflation?

While most economists agree tariffs will impair eurozone growth, their effect on inflation is less clear. Cheaper goods from China, lower energy prices, and a stronger euro versus the dollar are disinflationary, according to Ulrike Kastens, senior economist for Europe at DWS. The ECB wage tracker continues to indicate that negotiated wage pressure is easing, though she says services inflation is set to remain elevated throughout 2025.

Still, tariffs can lead to supply bottlenecks that may push prices higher, according to a paper by the Austrian National Bank.

Consumer prices in the eurozone increased by 2.2% year over year in March, according to Eurostat’s flash estimate, lower than February’s reading of 2.3% and in line with forecasts.

DWS forecasts headline inflation at 2.3% in 2025 overall, with a decline toward 2.0% in the second half, which is consistent with the ECB’s medium-term inflation target of 2.0%.

How do Interest Rate Cuts Affect Markets?

Equity markets tend to rise on anticipated rate cuts. In bond markets, falling interest rates mean lower yields, which pushes bond prices higher. Lower rates also make existing bonds, particularly those already issued during a period of high rates, more attractive for yields.

Meanwhile, cash savings rates on bank accounts will likely decrease, to the detriment of savers. The rates that savers receive depend mostly on the deposit facility, which defines the interest banks receive for depositing money with the ECB overnight. Borrowers, by contrast, benefit from lower rates as consumer debt and mortgages become cheaper.

When Are the Next ECB Meetings in 2025?

• June 5, 2025
• July 24, 2025
• Sept. 11, 2025
• Oct. 30, 2025
• Dec. 18, 2025