European Central Bank Reduces Interest Rates to Two Percent to Support Slowing Eurozone Growth

The European Central Bank (ECB) has announced a reduction in interest rates to 2%, marking the eighth consecutive quarter-point cut within a year. This decision aims to counteract the economic challenges faced by the 20-member eurozone, particularly following the impact of trade tensions stemming from Donald Trump’s policies. The latest rate adjustment brings the cost of borrowing to significantly less than half of the levels seen in the United Kingdom and the United States, where rates currently stand at 4.25% and between 4.25% and 4.5%, respectively.

Slower growth has been evident in key eurozone economies such as France, Germany, and Italy, with forecasts from the European Union painting a weak outlook for the following year. The ECB’s move comes as eurozone inflation softened to 1.9% last month, slipping below the bank’s 2% target for the first time in months. In a statement, the ECB noted that government spending on defence and infrastructure could provide medium-term support to the economy amidst ongoing uncertainties linked to global trade policies.

Christine Lagarde, President of the ECB, commented on the volatile economic conditions faced by the eurozone. Highlighting a robust labour market, growing real incomes, and solid private sector balance sheets, she expressed cautious optimism that these factors, combined with eased financing conditions, would help shield consumers and businesses from global upheavals. While Lagarde acknowledged the potential for additional rate cuts during this period of economic uncertainty, the overall sentiment appeared tentatively optimistic.

Even with some signs of increased manufacturing activity, the services sector has seemingly begun to cool. Economists, such as Mark Wall from Deutsche Bank, warned that the ongoing trade disputes could further disrupt eurozone exporters, deepening the existing inflation shortfall. Inflation rates are anticipated to fall to 1.6% in 2026 before stabilising back at 2%, with fluctuations largely driven by energy and food prices.

Irene Lauro, an economist specialising in the eurozone at Schroders, suggested that a stable inflation outlook allows the ECB to adopt a more measured and deliberate approach to monetary policy changes. Despite this, questions have arisen around Christine Lagarde’s leadership, with speculation surrounding her future role and external commitments. However, reassurances were made by the ECB president, who is expected to remain in office until the end of her term in 2027.

The decision to lower rates comes at a pivotal moment for the eurozone as it navigates global uncertainties, trade policy challenges, and shifting economic dynamics. The ECB’s proactive stance highlights its commitment to stabilising growth in the face of mounting concerns.