The European Central Bank has cut its benchmark interest rate by a quarter point to 2 per cent as it grapples with uncertainty over the impact of Donald Trump’s trade war.
Thursday’s widely expected decision is the central bank’s eighth quarter-point cut in a year. Since June 2024, rate-setters have now halved borrowing costs from a peak of 4 per cent.
The euro climbed to trade 0.5 per cent higher against the dollar at $1.147 after remarks by ECB President Christine Lagarde that the central bank’s easing cycle had “nearly concluded”.
Traders reined in their bets on rate cuts, with swaps markets pricing in just one more reduction in the second half of the year. Previously, markets had implied a small chance of two further cuts.
Most analysts predict that the unexpected strength of the euro since the US president’s “liberation day” tariff announcements in April, combined with lower energy prices and a potential rise in imports from China, will keep a lid on consumer price rises in the Eurozone.
“The risk of inflation undershooting target has clearly increased,” ING’s head of global macro Carsten Brzeski wrote in a note after the decision.
The central bank lowered its inflation outlook for this year to its medium-term 2 per cent target, down from the 2.3 per cent it predicted in March.
It also warned that “the uncertainty surrounding trade policies” would “weigh on business investment and exports, especially in the short term”.
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