As expected, the European Central Bank (ECB) cut its policy rates today for the seventh time in this cycle, marking its sixth straight cut. The interest rates on the main refinancing operations, the marginal lending facility, and the deposit facility were each lowered by 25 basis points to 2.40%, 2.65% and 2.25%, respectively.
Today’s decision to cut rates was expected given the swiftly deteriorating growth outlook amid rising trade tensions, which has now overridden much of the potential positive near-term growth factors, including a strengthening labor market and a stabilizing business confidence. Notably, greater European defense spending and Germany’s fiscal spending plans should still lift Euro area economic growth in 2026. Nevertheless, the backdrop remains mired in uncertainty, and the ECB has stopped describing its policy as “restrictive,” given incoming economic shocks.
With inflation now close to target, combined with the adverse impacts of increased trade uncertainty on market conditions and both firm and household confidence, further rate cuts will be necessary this year.
Recent developments
While the Eurozone has been building up some resilience against global shocks by shifting towards a more fiscal expansionary stance, downside risks stemming from trade policy have nonetheless dominated. Indeed, the economic outlook is clouded with exceptional uncertainty, triggered by the Trump Administration’s decision to increase import tariff rates. This will likely inflict a meaningful demand shock to the euro area, and with inflation already more subdued of late its path will likely fall below target within the forecast horizon. Meanwhile, the appreciation of the euro and lower energy prices have added downside risks to inflation.
While ECB President Christine Lagarde acknowledged that they will take these factors into account, the elevated tariff uncertainty—including the timing, scope and magnitude of U.S. actions—means that the ECB must adopt a more data dependent, agile approach to policy, keeping its options open as it assesses the combined impact of higher U.S. tariffs and higher fiscal spending in Europe.
