By Francesco Canepa and Balazs Koranyi
FRANKFURT (Reuters) – The European Central Bank cut interest rates for the seventh time in a year on Thursday and warned that economic growth will take a big hit from U.S. tariffs, bolstering bets for even more policy easing in the months ahead.
The ECB has taken borrowing costs to their lowest level since late 2022 as the sharp post-pandemic inflation spike has largely disappeared and fast-moving changes to trade policies sap business confidence and depress growth.
“Downside risks to economic growth have increased,” Lagarde told a press conference after policymakers agreed unanimously to cut the ECB’s benchmark rate by 25 basis points to 2.25%.
“The major escalation in global trade tensions and associated uncertainties will likely lower euro area growth by dampening exports, and it may drive down investment and consumption.”
While Lagarde gave away almost nothing about the bank’s next moves, insisting policymakers would decide meeting-by-meeting, some of her colleagues said the bar for further cuts is low.
Sources speaking to Reuters on condition of anonymity said that a cut in June was still highly possible and only a major easing in trade tensions would persuade them to pause.
Markets also took Lagarde’s warnings about growth risk as a signal that more easing will be necessary and priced in another two or three rate cuts before borrowing costs bottom out.
“We are convinced that there are more rate cuts to come,” ING economist Carsten Brzeski said. “The ECB’s sense of urgency has clearly increased.”
“However, everyone should know by now that rate cuts alone will not shield the eurozone economy against the current historic changes and challenges.”
Nevertheless, Lagarde insisted that governors would keep an open mind and sources inside the room said the Governing Council was balanced on Thursday. Unlike in some past meetings, there was no clear dominance by either policy “hawks” or “doves”.
Lagarde also downplayed the significance of the ECB’s decision to omit the last reference in its regular statement to interest rates restricting economic growth.
While Trump has paused most tariffs for the time being, many remain in place and volatility in financial markets has already done damage to the economy.
Lagarde said the ECB would not have full clarity by its next meeting in early June as that was before the end of the 90-day freeze Trump has put on his tariffs – set at 20% for the European Union.
