Just when the European Central Bank (ECB) seemed ready to hit pause on a months-long streak of interest rate cuts, U.S. President Donald Trump’s unpredictable trade policy has thrown a wrench into the mix.
After five consecutive reductions brought eurozone interest rates down from pandemic-era highs, there was growing speculation that the ECB would take a breather at its meeting this Thursday. But Trump’s surprise move to impose sweeping tariffs on the European Union—and later, a partial 90-day pause—has significantly increased the odds of yet another rate cut.
The back-and-forth in Washington has left ECB policymakers scrambling. “The situation can change in just a few weeks,” warned Ulrike Kastens, economist at DWS, a German asset management firm.
With the threat of U.S. tariffs looming large and potential retaliatory measures from the EU on the table, Kastens said the ECB may be forced to respond with another deposit rate cut to shield the eurozone economy.
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Speaking from Warsaw after meeting with EU finance ministers, ECB President Christine Lagarde signaled the bank’s readiness to act. “We are always ready to use the instruments that we have available,” she said, hinting that the ECB would not hesitate if trade tensions threaten financial stability.
The ECB’s deposit rate currently sits at 2.5%, down from a peak of 4% following a period of runaway inflation driven by pandemic disruptions and the economic fallout of Russia’s invasion of Ukraine. Eurozone inflation has since cooled, landing at 2.2% in March—just above the ECB’s 2% target.
While tariffs often raise concerns about inflation by making imports more expensive, some economists believe the current trade spat could actually dampen global growth and push prices down. “It’s more likely to be disinflationary,” Kastens said, pointing to falling oil prices and a potential influx of cheaper goods redirected from the U.S. to Europe.
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Capital Economics’ Andrew Kenningham echoed the sentiment, noting that Trump’s tariff drama could deliver a blow to business confidence, trade, and investment worldwide. “As a result, the ECB seems certain to cut interest rates by 25 basis points,” he said, predicting a drop in the deposit rate to 1.75% in the coming months.
ING analyst Carsten Brzeski didn’t mince words. Before Trump partially walked back the tariffs, he warned that “Europe’s worst economic nightmare just came true.” The tariffs threatened to hit the continent’s already fragile recovery and could trigger a broader economic slowdown.
Following the White House’s temporary reprieve, the EU has postponed its own retaliatory measures, opening the door to potential negotiations. But whether this brief pause will reassure the ECB is far from certain.
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Lagarde and other top ECB officials have repeatedly emphasized their commitment to a “meeting-by-meeting” strategy, driven by real-time data rather than pre-set expectations. The central bank’s March meeting already reflected a high level of caution, with Lagarde saying there were “risks all over and uncertainty all over.”
Kastens believes this extreme uncertainty will continue to guide the ECB’s approach for now. “Further interest rate cuts cannot be ruled out in the short term,” she noted. However, she also pointed out that Germany’s proposed fiscal stimulus—a long-awaited boost from Europe’s largest economy—could limit the need for deeper cuts.
French central bank governor François Villeroy de Galhau added a more optimistic note in a recent interview, suggesting that Europe’s “approaching victory over inflation” could provide room to lower rates again. But that was before the latest trade war twists.
All eyes will be on Lagarde’s press conference following Thursday’s ECB meeting. Investors and analysts alike will be listening closely for any signals on the bank’s next move amid this chaotic global backdrop.
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