Despite the uncertainty gripping the global economy, the European Central Bank’s (ECB) decision to continue cutting interest rates was a no-brainer.
The main market fallout from US president Donald Trump’s increasingly erratic trade policy (apart from the violent stock market swings) has been a stronger euro-dollar exchange rate.
This (combined with falling energy prices) is already having a disinflationary impact on the euro zone economy. A stronger euro makes imported goods and services, including energy, cheaper to buy.
With price growth softening (it slowed to 2.2 per cent in March) and likely to soften further, the ECB’s latest quarter-point rate cut, the seventh since last June, was probably an easy decision. ECB president Christine Lagarde confirmed it was unanimous.
[ ECB interest rate cut: What does it mean for mortgage borrowers?Opens in new window ]
But that’s not what’s exercising minds in Frankfurt. Mr Trump is threatening to blow up world trade right when the euro zone economy is on the floor.
Growth across the bloc is hovering at less than 1 per cent and the forecasts for 2025 looked fragile even before the current tariff debacle. The continent’s powerhouse economy, Germany, hasn’t seen significant growth in five years.
[ ECB cuts interest rates again amid tariff turmoilOpens in new window ]
The ECB is almost certainly cutting rates as insurance against or in anticipation of a tariff-induced shock to the economy.
There had been speculation after its March rate cut that the ECB might pause its rate-cutting cycle in April in response to Germany’s significant fiscal measures but Mr Trump’s “Liberation Day” tariff announcement blew the doors off that speculation.
The likely hit to headline growth and employment across Europe from tariffs, ongoing US policy uncertainty and deteriorating financial conditions (with firms pressing pause on planned investment) will, as Ms Lagarde told reporters, take time to play out.
“1 in 5 US households consume Kerrygold” – Ornua CEO Conor Galvin
The complex weave of trading relations combined with the US’s on-off tariff announcements and the looming breakdown of US-China trade makes forecasting difficult. That said, Swiss bank UBS has downgraded its euro zone growth outlook to 0.5 per cent from 0.9 per cent in 2025 and to 0.8 per cent from 1.1 per cent in 2026.
“Increasing global trade disruptions are adding more uncertainty,” Ms Lagarde said. “Falling global energy prices and the appreciation of the euro could put further downward pressure on inflation. This could be reinforced by lower demand for euro-area exports owing to higher tariffs and a rerouting of exports into the euro area from countries with overcapacity,” she said.
In a statement, released alongside the rate decision, the ECB’s governing council said the 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”.
Despite the deteriorating growth outlook, the forecast for borrowers remains relatively positive.
“Current pricing suggests traders expect the ECB to cut rates by 25 basis points again in June,” AIB’s chief economist David McNamara said.
“In total, around 65 basis points of policy easing from the ECB is anticipated over the remainder of this year,” he said. “This would see the deposit rate end the year at circa 1.5 per cent,” he said.
