ECB cuts interest rates as EU likely to counter US tariffs

The European Central Bank cut interest rates as expected on Thursday and kept all options on the table for future meetings, despite growing pressure for a summer break in its annual easing cycle.

The ECB has cut borrowing costs eight times since June last year, by a total of 2 percentage points, in an effort to support the eurozone economy, which was already struggling before unpredictable US economic and trade policies dealt it new blows.

With inflation now firmly in line with the 2% target and rate cuts already in sight, attention has turned to the ECB's message on the direction ahead, especially given that rates at 2% are now in a “neutral” range where they neither boost nor hinder growth.

However, the eurozone's 20-nation central bank gave little hint in its statement, sticking to its mantra that decisions will be made at each meeting based on incoming data.

“The Governing Council does not make any ex ante commitment to a specific path for interest rates,” the ECB said. “Decisions on interest rates will be based on its assessment of the inflation outlook, taking into account incoming economic and financial data, the development of core inflation and the strength of the monetary policy transmission.”

ECB President Christine Lagarde's press conference scheduled for 12:45 GMT could provide more insight into the coming months as the most aggressive monetary easing cycle since the 2008/09 global financial crisis is expected to begin to come to an end.

Investors are already pricing in a July break, and some Conservative policymakers are arguing for a pause to give the ECB a chance to reconsider how exceptional uncertainty and political turmoil both at home and abroad might change the outlook.

While ECB board member and leading hardliner Isabel Schnabel has openly called for a break, others are taking a more cautious stance, and Lagarde is likely to stick to language that leaves the ECB flexible in its actions as the outlook can change quickly.

The argument for a pause is based on the assumption that the currency bloc's short- and medium-term prospects differ significantly and may require different policy responses.

Inflation may decline in the short term – perhaps even below the ECB's target – but increased government spending and rising trade barriers could increase price pressures going forward.

An added complication is that monetary policy has a 12-18 month lag in its impact on the economy, so support approved now may be unnecessary for a bloc that no longer requires such assistance.

Still, investors still expect at least one more rate cut this year and a small chance of additional cuts in the future, especially if U.S. President Donald Trump's trade war escalates.

Acknowledging short-term weakness, the ECB has cut its inflation forecast for next year.

Trump's tariffs are already hurting economic activity and will have long-term consequences even if a peaceful solution is found, given the negative impact on confidence and investment.

“A further escalation of trade tensions in the coming months would push growth and inflation below our baseline projections,” the ECB said. “Conversely, if trade tensions resolve favourably, growth and, to a lesser extent, inflation would be higher than our baseline projections.”

This sluggish growth, along with lower energy costs and a strong euro, will keep price pressures in check.

Indeed, most economists believe inflation could fall below the ECB's 2% target next year, evoking memories of the pre-pandemic decade when price growth consistently fell below 2%, even if forecasts point to a return to target by 2027.

The outlook will change significantly in the future.

The European Union is likely to retaliate if the US imposes permanent tariffs, which would make international trade more expensive.

At the same time, companies may relocate some of their operations to avoid trade barriers, but changes in corporate value chains are also likely to increase costs.

Increase in equipment costs

Sourse: breakingnews.ie

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