The European Central Bank has cut interest rates across the 20-member eurozone for the second time this year to bolster economic activity, as Europe braces for Donald Trump to impose damaging tariffs on EU exports to the US.
The Frankfurt-based rate setter cut its benchmark deposit rate by a quarter of a percentage point to 2.5%, in line with City economist expectations, as Trump prepares to impose 25% tariffs on all goods imported from the EU, in line with similar actions taken against Canada and Mexico.
“The disinflation process is well on track,” the ECB declared as it announced its decision. “Inflation has continued to develop broadly as staff expected, and the latest projections closely align with the previous inflation outlook.”
After six cuts in the cost of borrowing in the last year, ECB officials are understood to be hesitant about going further while the international situation remains volatile and the recent fall in inflation could reverse.
Price pressures eased in February, as inflation fell to 2.4% from 2.5% in January, according to a flash estimate by Eurostat, and services inflation dropped to 3.7% – below 3.9% for the first time since April 2024.
However, increases in energy prices in response to the uncertainty surrounding “peace talks” to end the Russian invasion of Ukraine could upend projections that inflation will fall back to the 2% target by the first quarter of 2026.
The deposit rate sets the interest that banks receive when they make overnight deposits with the eurosystem.
The ECB also cut its main refinancing rate, paid by banks when they borrow funds from the central bank on a weekly basis, by a quarter of one percentage point, to 2.65%.
The marginal lending facility rate, charged when banks borrow overnight from the ECB, has been cut from 3.15% to 2.90%.
The ECB is also under pressure to prevent a steep rise in eurozone government borrowing costs after the German chancellor-in-waiting, Friedrich Merz, said his country would “do whatever it takes” to rearm.
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Merz is keen to lift a debt brake that has prevented successive German governments since the 2008 financial crash from lifting borrowing significantly.
This sparked a surge in German borrowing costs this week, and a knock-on impact on Italian and French bonds, which have risen sharply in recent days, putting pressure on Paris and Rome to make spending cuts to balance the books.
