FRANKFURT, Germany (AP) — Lower inflation and concern that U.S. President Donald Trump’s trade war will slow already modest growth have cleared the way for the European Central Bank to cut interest rates at Thursday’s policy meeting, a step that would lower borrowing costs for consumers and businesses and promote economic activity.
With a cut widely expected by market analysts, a key question is how low the bank will go, given uncertainty about the impact of U.S. trade policy on Europe’s export-dependent economy. Bank President Christine Lagarde will face questions about the bank’s outlook for coming meetings at her post-decision news conference.
A cut of a quarter percentage point would be the eighth rate cut since June 2024 and would take the bank’s benchmark rate to 2%.
Trump on April 2 announced a 20% tariff, or import tax, on goods from the European Union. He later threatened to raise the tariff to 50% after expressing dissatisfaction with the progress of trade talks with the EU. Trump and the EU’s executive commission have agreed to suspend implementation and any retaliation by the EU until July 14 as negotiators seek to reach agreement.
Trump added more disruption this week by suddenly increasing a 25% tariff on steel imports to 50% for all countries except for the U.K.
The threat of even higher tariffs has raised fears that growth will underperform already modest forecasts. The EU’s executive commission lowered its growth forecast for this year to 0.9% from 1.3% on the optimistic assumption that the 20% tariff rate can be negotiated down to no more than 10%.
Low inflation has bolstered the ECB’s ability to cut rates. Annual inflation for the 20 countries that use the euro fell to 1.9% in May from 2.2% in April as energy prices eased.
The ECB raised rates to a record high of 4% to suppress a 2021-2023 inflation outbreak that reached double digits. But with inflation now below its 2% target, the bank has more freedom to cut. Lower rates make it cheaper to borrow and buy things, supporting demand for goods and in theory increasing spending and investment.
