Market News

BY  Phillip Inman

The European Central Bank has cut interest rates to 2% in an effort to boost flagging economic growth across the eurozone.

The ECB, making its eighth quarter-point cut in a year, said the 20-member currency bloc needed a reduction in the cost of borrowing as it reeled from the damage caused by Donald Trump’s trade wars.

On Tuesday, Trump noted the repeated interest rate cuts in Europe, and said: “ADP NUMBER OUT!!! ‘Too Late’ Powell must now LOWER THE RATE. He is unbelievable!!!” in a reference to weak private sector payroll numbers given by the US data provider Automatic Data Processing.

The ECB cut its main deposit rate from 2.25% to 2% after inflation across the eurozone fell to 1.9% last month, below the central bank’s 2% target, for the first time since last September.

The ECB said US tariffs would hit growth, but extra government spending on defence would fill some of the gap.

“While the uncertainty surrounding trade policies is expected to weigh on business investment and exports, especially in the short term, rising government investment in defence and infrastructure will increasingly support growth over the medium term,” it said.

However, the ECB’s president, Christine Lagarde, said: “A strong labour market, rising real incomes, robust private sector balance sheets and easier financing conditions … should all help consumers and firms withstand the fallout from a volatile global environment.”

She added: “Are we confident [about the outlook]? I think that would be a bit far-fetched. But we are well-positioned at the moment.”

Lagarde said the vote to cut rates was “virtually unanimous”, after only one member of the governing council voted to keep rates on hold.

The ECB president said it was difficult to know whether interest rates would need to fall further during a period of “significant uncertainty” in the global economy.

She warned that while manufacturing had strengthened, according to recent data, the domestically focused services sector was slowing.

Mark Wall, Deutsche Bank’s chief European economist, said the central bank might make further cuts if the trade war hurt eurozone exporters more than expected.

“The trade war is inherently unpredictable. The inflation undershoot could deepen and persist,” he said.

Inflation in the eurozone is forecast to fall to 1.6% next year before rising to 2% in 2026, largely as a result of fluctuations in energy and food prices.

Irene Lauro, a eurozone economist at the asset manager Schroders, said the stable outlook meant “the ECB can afford to shift from urgency to patience”.

Lagarde’s role as ECB president has come under the spotlight since the ousted head of the World Economic Forum, Klaus Schwab, said she had been involved in discussions to replace him.

Lagarde, whose eight-year term is due to end in October 2027, dismissed concerns that she was poised to quit her job, saying she was committed to seeing out her tenure as president, adding: “You are not about to see the back of me.”