European Central Bank expected to cut rates again amid worries about Trump’s tariffs

Worries about economic growth fueled by U.S. President Donald Trump’s tariff onslaught will likely push the European Central Bank to cut interest rates on Thursday for a seventh straight time, a move that should make credit more affordable for business and consumers and promote economic activity.

At the bank’s last meeting on March 6, ECB President Christine Lagarde had raised the possibility of an upcoming “pause” in the bank’s series of rate cuts. But that option was practically eliminated on April 2, when Trump shocked global markets with proposals for unexpectedly high new tariffs, or import taxes, of 10% to 49% on global trading partners.

Analysts say Thursday’s meeting of the bank’s rate-setting council in Frankfurt should see a quarter-point cut in the bank’s benchmark rate to 2.25%. The bank has been steadily cutting rates after raising them sharply to combat an outbreak of inflation from 2022 to 2023.

Now that inflation has fallen, growth worries have taken center stage. The economy in the 20 countries that use the euro grew a modest 0.2% in the last three months of 2024. Inflation was 2.2% in March, close to the bank’s target of 2%.

The bank’s benchmark steers rates throughout the economy. Lower interest rates make it less expensive to borrow money and buy goods ranging from homes to new factory equipment. That supports spending, business investment and hiring.

Trump has suspended the tariffs for 90 days, but the possibility of the 20% tariff rate he has proposed for Europe left economists and policymakers concerned that the higher costs will weigh on business activity — and lead to slower growth or even a recession if he carries through. The U.S. is Europe’s largest trade partner with some 4.4 billion euros ($5 billion) in goods and services crossing the Atlantic every day in both directions.

As the European Commission puts it, “the transatlantic trade relationship is the most important commercial relationship in the world.”

Uncertainty is another factor that could slow the economy since Trump’s pause for negotiations leaves it unclear where the tariff rate will actually settle. Businesses may hold off on making decisions if they don’t know what their costs will be.

Economists at Berenberg bank think that by mid-year some of the tariffs will be negotiated away, ending at around 12%. However that is still around 10 percentage points higher than average tariffs before Trump. On top of that comes a separate 25% tariff on autos from all countries which will hit Europe’s prominent auto industry hard.