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Europe's central bank expected to lower
interest rates as Trump's trade war threatens growth
[June 05, 2025]
By DAVID McHUGH
FRANKFURT,
Germany (AP) — Lower inflation and concern that U.S. President Donald
Trump's trade war will slow already modest growth have cleared the way
for the European Central Bank to cut interest rates at Thursday's policy
meeting, a step that would lower borrowing costs for consumers and
businesses and promote economic activity. |
The European Central Bank, right, is pictured in Frankfurt, Germany,
Wednesday, June 4, 2025. (AP Photo/Michael Probst) |
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With a cut widely expected by market analysts, a key question is
how low the bank will go, given uncertainty about the impact of
U.S. trade policy on Europe’s export-dependent economy. Bank
President Christine Lagarde will face questions about the bank’s
outlook for coming meetings at her post-decision news
conference.
A cut of a quarter percentage point would be the eighth rate cut
since June 2024 and would take the bank's benchmark rate to 2%.
Trump on April 2 announced a 20% tariff, or import tax, on goods
from the European Union. He later threatened to raise the tariff
to 50% after expressing dissatisfaction with the progress of
trade talks with the EU. Trump and the EU's executive commission
have agreed to suspend implementation and any retaliation by the
EU until July 14 as negotiators seek to reach agreement.
Trump added more disruption this week by suddenly increasing a
25% tariff on steel imports to 50% for all countries except for
the U.K.
The threat of even higher tariffs has raised fears that growth
will underperform already modest forecasts. The EU's executive
commission lowered its growth forecast for this year to 0.9%
from 1.3% on the optimistic assumption that the 20% tariff rate
can be negotiated down to no more than 10%.
Low inflation has bolstered the ECB's ability to cut rates.
Annual inflation for the 20 countries that use the euro fell to
1.9% in May from 2.2% in April as energy prices eased.
The ECB raised rates to a record high of 4% to suppress a
2021-2023 inflation outbreak that reached double digits. But
with inflation now below its 2% target, the bank has more
freedom to cut. Lower rates make it cheaper to borrow and buy
things, supporting demand for goods and in theory increasing
spending and investment.
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