The European Central Bank (ECB) has cut interest rates by 0.25 percentage points, bringing the benchmark deposit rate down to 2.25% from 2.5%. This marks the seventh rate reduction in a year as the central bank continues to ease monetary policy amid growing concerns about US tariffs and their potential impact on the European economy.
The rate cut, announced on Thursday, April 17, 2025, was widely expected by market analysts. The ECB began its easing cycle in June last year when rates were at a high of 4%. The decision comes as the EU faces potential 20% tariffs if it fails to reach an agreement with the US before President Donald Trump’s 90-day suspension period ends.
European inflation declined to an annual rate of 2.2% in March, edging closer to the ECB’s target of 2%. This has given the central bank room to continue reducing borrowing costs to support economic growth in the region.
Trade Tensions Driving ECB Policy
In its statement, the ECB noted that “the disinflation process is well on track” but warned that “the outlook for growth has deteriorated owing to rising trade tensions.” The bank earlier estimated that growth across the 20 countries in the eurozone could fall by half a percentage point if US tariffs are imposed, erasing roughly half of the bloc’s expected expansion.
ECB governing council member Gediminas Šimkus had previously argued that US tariff decisions warrant a more accommodative monetary policy. He specifically mentioned that a 25-basis-point cut would be needed in April.
The euro declined against both the pound and dollar following the announcement. It lost 0.2% against sterling to trade at 85.9p and dropped 0.2% against the US dollar to $1.138.
Divergence from US Federal Reserve
The ECB’s rate-cutting pace has drawn criticism from President Trump toward the US Federal Reserve and its Chair Jerome Powell. In a social media post on Thursday, Trump accused Powell of acting too slowly compared to the ECB.
“‘Too Late’ Jerome Powell of the Fed, who is always TOO LATE AND WRONG, yesterday issued a report which was another, and typical, complete mess!” Trump wrote on Truth Social. He added that Powell “should have lowered Interest Rates, like the ECB, long ago.”
The Federal Reserve has been more cautious about cutting rates due to different economic conditions in the US. The ECB, on the other hand, appears more concerned about the risk of slower growth than potential inflation pressures.
Diplomatic Efforts Underway
Italian Prime Minister Giorgia Meloni is heading to Washington for talks with President Trump aimed at easing tensions over the proposed US tariffs against the EU. The outcome of these discussions could influence future ECB decisions.
Kenneth Broux, an analyst at Societe Generale, described the day as “a bit of a Super Thursday for the euro, for the European bond market, but also for the European economy at large… it could be quite a pivotal moment.”
Broux suggested that if Meloni can extract concessions leading to an improved bilateral trade position, “the ECB can be a little bit more relaxed” about future monetary policy decisions.
ECB President Christine Lagarde was expected to address the impact of Trump’s tariff policies during her press conference scheduled for 1:45 PM UK time on Thursday. Market participants were looking for hints about the future pace of rate cuts.
Carsten Brzeski, ING’s global head of macro, warned that “the ongoing trade tensions as well as a high level of uncertainty could force the ECB to cut interest rates further than it would currently like to admit.” He also noted that the strengthening of the euro exchange rate “will insert more disinflationary pressure on the euro zone.”
Emmanuel Cau, an analyst at Barclays, cautioned that “it’s too early for the ECB to really go much more aggressive on the dovish stance.” He added that market participants want to see “progress on trade deals, whether it’s China, Europe or Japan, and that will be more important than anything else.”
When the ECB last cut rates in March, it adjusted its language around monetary policy, describing it as “becoming meaningfully less restrictive.” This subtle change in communication suggests the bank recognizes the ongoing shift in its stance.
Source: MoneyCheck.com / Digpu NewsTex