Central Bank lowers interest rates by 0.25% to 2% amidst sluggish economic expansion and escalating trade disputes.
Europe's Economic Dilemma: Navigating Trade Wars and Inflation
Europe's Finances Take a Hit from Trade Tussles
The European economy, battered by the U.S.-led trade war, required a lifeline from the European Central Bank (ECB) last Thursday, with interest rates slashed by 25 basis points. The deposit facility rate, acting as the ECB's key interest rate, now sits at 2%, last seen in December 2022.
Meanwhile, the rate on main refinancing operations (MRO) dropped to 2.15%, whereas the marginal lending facility rate stands firm at 2.4%. ECB President Christine Lagarde expressed confidence during a press conference, stating, "We're holding our own in this challenging environment."
The rate cut comes a year after the ECB initiated its rate-cutting spree, having previously hiked rates from 0% to 4.5% in just two years to tackle rampant inflation, which soared to double digits in the eurozone. Although market expectations suggest this could be the only cut for the time being, with the next one potentially not until the fall, this is the seventh consecutive cut in the cost of money and the eighth adjustment in this monetary easing cycle.
Addressing Inflation and Growth
Inflation, currently at 1.9% in May, is under control in the eurozone, but the economy remains static, with a meager 0.3% growth in the first quarter. The rate reductions aim to rekindle growth by making borrowing cheaper, incentivizing consumers, businesses, and governments to take out loans, thereby boosting consumption, investment, and overall economic activity.
However, the ECB warns of potential risks, such as increased indebtedness and lower savings returns.
In any case, the outlooks for the European economy are murky. Most international organizations have revised their growth projections for the eurozone in 2025 and 2026 due to trade war uncertainties. The Organisation for Economic Co-operation and Development (OECD) recently projected a 1% growth rate for this year, a significant drop from the 1.3% previously estimated, and 1.2% for 2026 instead of the 1.5% projected in December.
Caught in the Crossfire: The European Trade Skirmish
Donald Trump's trade war has not turned out to be the positive game-changer he hoped for. In fact, tensions have escalated, leading to a 25% to 50% increase in tariffs on steel and aluminum imports, effective next Wednesday. Critics question the measure, arguing it "jeopardizes the possibility of a negotiated resolution" among trading partners. The European Commission has already announced potential retaliatory measures, contingent on both sides failing to reach an "acceptable" solution.
In a worst-case scenario, increased tariffs could slow economic activity, reduce prices, stimulate dollar appreciation, and lead to imported inflation in the eurozone. On the other hand, if the U.S. reconsiders its tariff policies, growth and inflation would likely exceed the current projections.
The ECB has noted that while uncertainty surrounding trade policies affects business investment and exports, particularly in the short term, an increase in public investment in defense and infrastructure would gradually support long-term growth.
ECB's New Forecasts: Inflation and Growth Projections
On Thursday, the ECB unveiled its new macroeconomic projections. It has revised down the average inflation forecast for the eurozone in 2025 by 0.3 percentage points, aligning it with the target of 2%. The same adjustment applies to 2026, bringing the forecast down to 1.6%. In terms of economic growth, projections remain stagnant at 0.9% in 2025 and fall by one tenth, to 1.1%, in 2026.
Daunting Questions: Lagarde's Future at the ECB
Rumors have been swirling about Christine Lagarde's possible resignation from her role as ECB president, following the revelation that she had considered stepping down to become the president of the Davos Forum. However, Lagarde dismissed the claims during a press conference, reassuring everyone that she is "fully committed to fulfilling my mission and seeing this mandate through." She ended the conference with a jest, saying, "I'm sorry to disappoint you, but you won't shake me off that easily."
The average inflation rate in 2025, as projected by the ECB, is now 2%, a decline of 0.3 percentage points from previous forecasts, highlighting the ongoing challenges in the general-news sector and within the industry of finance.
The European industry of politics is keeping a close watch on the potential impact of trade wars, particularly the escalation of tariffs on steel and aluminum imports, as such tussles could have widespread consequences on economics, finance, and general-news landscapes.
