ECB cuts rates as trade war fears cloud Europe’s economy

The European Central Bank cut its main interest rate by a quarter point on Thursday, citing rising trade tensions following U.S. President Donald Trump’s sweeping tariff campaign. The decision brings the rate down to 2.25 percent, marking the ECB’s seventh cut in the past year.

In a statement, the bank said eurozone economies had built some resilience against global shocks, but the outlook for growth had worsened. Trade friction, it said, was now a defining risk.

ECB President Christine Lagarde told reporters the effects were already visible. Business investment was slowing, she said, and consumers were growing cautious. “Disruptions to international commerce, financial market tensions and geopolitical uncertainty are weighing on business investment,” Lagarde said. “As consumers become more cautious about the future, they may pull back on spending.”

Trump’s tariff policy, announced on April 2, has sparked a broader trade war with retaliatory threats from Europe and Asia. Economists warn the fallout may ripple through global supply chains.

Yael Selfin, chief economist at KPMG, said trade disruptions could lead to a glut of manufactured goods and potential deflation. “The outfall of the trade disruptions could create a global glut of manufactured goods,” she said. “That could push prices into deflationary territory this year.”

While the ECB has moved to protect the eurozone economy, the U.S. Federal Reserve has taken a different approach. At its most recent policy meeting in March, the Fed held interest rates steady. Chair Jerome Powell signalled that uncertainty from Trump’s tariffs may keep rates unchanged for the foreseeable future.

Speaking in Chicago on Wednesday, Powell offered his strongest remarks yet. “These are very fundamental policy changes,” he said, warning that the tariffs could drag on growth.

Trump reacted swiftly. On social media, he criticised Powell’s decision to hold rates and called the Fed’s latest report a “complete mess.” He added, “Powell’s termination cannot come fast enough.”

Lagarde responded with calm defiance. “I have a lot of respect for my esteemed colleague and friend Jay Powell,” she said at her press conference. She also underscored the ECB’s independence, warning against political interference in monetary policy.

“For us, here, the independence of central banks is fundamental,” Lagarde said. “Any country that wants to join the eurozone must prove it can uphold that independence in law and in practice.”

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