The European Central Bank (ECB) has lowered interest rates across the eurozone for the second time this year, cutting its benchmark deposit rate by 25 basis points to 2.5%. The decision comes as fears of an escalating trade war mount, with former U.S. President Donald Trump preparing to impose 25% tariffs on EU exports.
ECB President Christine Lagarde attributed the rate cut to “high trade and policy uncertainty,” which has forced a downward revision of growth forecasts for the coming years.
The central bank now projects GDP growth of just 0.9% in 2025, 1.2% in 2026, and 1.3% in 2027, citing weaker exports and investment concerns. Despite economic headwinds, the ECB acknowledged progress in its fight against inflation, stating that disinflation remains on track. However, it raised its inflation forecast for 2025 to 2.3%, up from a previous estimate of 2.1%, due to rising energy prices.
Geopolitical uncertainty surrounding peace talks to end the Russia-Ukraine war poses additional risks, particularly if energy price increases feed into food inflation. Lagarde cautioned that such developments could delay the ECB’s goal of bringing inflation back to 2% by early 2026.
The ECB also reduced its main refinancing rate to 2.65% and cut the marginal lending facility rate from 3.15% to 2.90%. While the central bank signaled that its monetary policy stance is becoming “less restrictive,” officials remain cautious about further cuts, emphasizing the need to assess the impact of previous rate adjustments.
Meanwhile, the ECB faces mounting pressure to manage rising eurozone borrowing costs after German chancellor-in-waiting Friedrich Merz pledged to increase military spending, triggering a spike in German bond yields. This has also affected French and Italian government bonds, raising concerns about fiscal stability in key EU economies. As uncertainty looms over trade policies, inflation trends, and geopolitical risks, the ECB’s cautious approach signals that future rate cuts may be gradual and dependent on evolving economic conditions.
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