ECB cuts benchmark interest rate by quarter point as Trump tariffs
threaten economy
[June 06, 2025] By
DAVID McHUGH
FRANKFURT, Germany (AP) — The European Central Bank cut its benchmark
interest rate for an eighth time, aiming to support businesses and
consumers with more affordable borrowing as U.S. President Donald
Trump’s trade war threatens to slow already tepid growth.
The bank’s rate-setting council cut interest rates by a quarter of a
point Thursday at the bank’s skyscraper headquarters in Frankfurt.
Analysts expected a cut, given the gloomier outlook for growth since
Trump announced a slew of new tariffs April 2 and subsequently
threatened to impose a crushing 50% tariff, or import tax, on European
goods.
The bigger question remains how far the bank will go at subsequent
meetings. Bank President Christine Lagarde indicated at a post-decision
news conference that much depends on whether trade tensions with the
U.S. can be resolved.
“A further escalation in global trade tensions and associated
uncertainties could lower euro area growth by dampening exports and
dragging down investment and consumption,” Lagarde said. “By contrast,
if trade and geopolitical tensions were resolved swiftly, this could
lift sentiment and spur activity. A further increase in defense and
infrastructure spending, together with productivity enhancing reforms,
would also add to growth.”
While the trade war and the uncertainty that goes with it is holding
back growth, the ECB said the economy should get additional stimulus
from higher government spending on defense and infrastructure. European
governments are stepping up plans for defense purchases to counter
Russia and its invasion of Ukraine. The spending boosts arrive amid
concern that the U.S. is no longer a fully committed ally in support of
Ukraine.
Given the level of uncertainty, Lagarde said, the bank was “not
committing to a particular rate path” for future policy meetings.
Thursday’s decision took the bank’s benchmark rate to 2%, down from a
peak of 4% in 2023-24.
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The European Central Bank, right, is pictured in Frankfurt, Germany,
Wednesday, June 4, 2025. (AP Photo/Michael Probst)
 Lagarde also addressed a
journalist's question about a report in the Financial Times that she
had discussed leaving her post before the end of her term to become
head of the World Economic Forum in Davos, Switzerland. “I can very
firmly tell you that I have always been, and am, fully determined to
deliver on my mission, and I’m determined to complete my term." she
said. "So I regret to tell you that you’re not about to see the back
of me.” Lagarde’s eight-year term ends October 31, 2027.
The bank raised rates to suppress an outbreak of
inflation in 2021-23 that was triggered by Russia’s invasion of
Ukraine, and by the rebound from the pandemic. But as inflation
fell, the bank shifted gears toward supporting growth by lowering
rates. With inflation now down to 1.9%, below the bank’s target of
2%, analysts say the bank has room to take rates even lower to
support growth.
Trump 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's executive commission, which handles trade issues for the
27-member union. 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%.
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