Donald Trump’s unpredictable policy decisions provide the European Central Bank (ECB) with an opportunity to decisively lower interest rates. Despite a temporary delay in implementing full reciprocal tariffs on European goods, a 10% tax on U.S. exports to Europe remains in place, coupled with the ongoing risk of a global economic slowdown. This situation demands a robust response from the ECB.
Prior to the tariff discussions, ECB President Christine Lagarde had refrained from committing to a rate cut, as the current key rate stands at 2.5%. However, following Trump’s announcement, analysts largely anticipate a 25 basis point reduction at the next meeting on April 17. Nevertheless, given the potential economic fallout from the tariffs, there is a strong argument for a more impactful cut of 50 basis points.
Indeed, even before the tariff tensions escalated, the ECB projected a mere 0.9% growth in the eurozone economy for the year. With the new tariffs in play, analysts estimate a potential reduction in GDP growth by about 0.3 percentage points, according to Nomura. The uncertainty surrounding Trump’s policies may further deter investment and corporate decision-making, exacerbating the economic challenges.
Concerns regarding inflation increases due to tariffs are overstated, particularly as the EU’s response has been relatively tempered. Furthermore, factors such as China’s ongoing tariffs could lead to an influx of low-cost exports into Europe, exerting downward pressure on prices. In addition to global economic pressures, the ECB must also consider the strength of the euro, which has appreciated by 10% against the dollar since Trump’s tenure began.
This currency strength makes imports cheaper and contributes to lower inflation. With inflation projected at around 1.9% for the coming year, the ECB’s current rate of 2.5% is likely too high. Even if it drops to 2.0%, the ongoing reduction of the ECB’s balance sheet will help to maintain inflation control.
Given the clear risks posed by a global downturn, it is time for the ECB to pursue aggressive rate cuts.