FRANKFURT - The European Central Bank (ECB) cut interest rates for the seventh time in a year on Thursday, looking to prop up an already struggling euro zone economy that will take a knock from US tariffs.
Policymakers were unanimous in approving the cut, as even some of the more hawkish rate-setters agreed that a global trade war has significantly altered the outlook, a source told Reuters.
ECB president Christine Lagarde noted that inflationary pressures had dwindled but warned that US President Donald Trump’s tariffs threatened to damage an already fragile euro zone economy.
“The major escalation in global trade tensions and associated uncertainties will likely lower euro area growth by dampening exports,” she said in a press conference.
She also said the recent strengthening of the euro, as the dollar has dropped, could push down inflation by cheapening imports.
The euro extended falls after the decision and was last trading at $1.1339, down 0.5% on the day, having traded at $1.1367 just before.
Euro zone bond yields fell sharply as investors priced in more rate cuts from the ECB.
Germany’s 2-year bond yield, which is sensitive to ECB rate expectations, was flat at 1.75%, having traded around 1.81% earlier. Europe’s broad STOXX 600 index was down 0.3%, holding lower on the day.
Germany’s 10-year bond yield, the benchmark for the euro bloc, was down 4 bps at 2.467%, having traded 3 bps higher before the decision.
Money markets were last pricing in an ECB rate of roughly 1.57% by the end of the year, down sharply from 1.71% before the announcement.
“Overall, this was clearly a dovish meeting,” said Max Stainton, senior global macro strategist at Fidelity International.
“The (ECB) General Council’s statement and President Lagarde’s comments in the press conference clearly showed an awareness that growth and inflation risks are both moving to the downside.”
Bond markets have been volatile since Trump announced sweeping tariffs on April 2, even after he rolled most of them back, as investors struggle to gauge where his policies are headed.
Trump said there was “big progress” in preliminary talks with a Japanese trade delegation in Washington about the barrage of tariffs he has imposed.
Investors have favoured German bunds as a safe-haven asset, helping yields fall to their lowest since chancellor-in-waiting Friedrich Merz announced a dramatic boost in government spending in early March.