The European Central Bank cut interest rates as expected on Thursday, easing for the seventh time in the past year as U.S. tariffs and faltering business confidence sap already weak economic growth.
Arguing that inflation is well on its way to the 2% target, the central bank for the 20 nations sharing the euro cut its deposit rate by 25 basis points to 2.25%, in line with the expectation of most economists polled by Reuters.
It also tweaked its language, dropping a previous assessment that interest rates are “meaningfully less restrictive”, arguing instead that several factors may weigh on growth now.
“Increased uncertainty is likely to reduce confidence among households and firms, and the adverse and volatile market response to the trade tensions is likely to have a tightening impact on financing conditions,” the ECB said.
“These factors may further weigh on the economic outlook for the euro area,” the ECB said in a statement.
The change comes as interest rates are now at the top end of the ECB’s “neutral rate”, a level which neither restricts nor stimulates economic growth.
The bank has previously put this range at 1.75% to 2.25% but policymakers have downplayed the significance of the figures, arguing that it is conceptually important but not relevant to day-to-day policymaking.
Still, the bank maintained its past guidance that the disinflation process is well on track.
Financial markets still expect at least two more rate cuts from the ECB this year and some even see a third move because financial market volatility, tariffs and economic uncertainty are all likely to weaken growth and consequently inflation.
But the ECB gave little to no hint about future moves, maintaining its standard line that its next decision would depend on the evolution of incoming data and it would stick to its meeting-by-meeting approach.
Nevertheless, Lagarde, who will speak at a 1245 GMT news conference, is likely to say that the bloc is facing a large hit to economic growth and even if there is an eventual trade deal, the hit to confidence will have a meaningful impact.
She earlier predicted a growth hit of up to 0.5 percentage point, a figure that would wipe out half the bloc’s expected expansion.
Lagarde is also likely to argue that inflation pressures have eased meaningfully since the ECB’s March meeting, given a sharply stronger euro, a big fall in energy costs and more muted growth prospects.
She may also argue that big U.S. tariffs on China would force Beijing to dump goods on other markets, possibly weighing on prices and cutting inflation quicker than earlier thought.
(Reporting by Balazs Koranyi)
