European Central Bank cuts interest rates, warns of 'deteriorated' growth outlook on trade tensions

The ECB appears open to further interest rate cuts after announcing a 25 basis point trim, according to Mark Wall, chief European economist at Deutsche Bank.

"The forwarding-looking view on the economy implies an expected shock from tariffs, and the characterisation of 'exceptional' uncertainty, implies an openness to further monetary easing assuming the trade shock persists and is borne out in the data," Wall said in a note.

"We continue to expect another rate cut in June and a terminal rate of 1.5% by year-end," Wall said.

This sentiment regarding further cuts was echoed by other economists and analysts, with Capital Economics Chief Europe Economist Andrew Kenningham saying the ECB was likely to cut rates at both its June and July meetings.

— Sophie Kiderlin

"We are in the presence of a negative demand shock," ECB President Christine Lagarde said during a press conference as she noted that while some tariffs are in place, "something that could be far more impactful" could be on the horizon.

Lagarde said there would likely be some re-routing of goods supplied by markets that are facing higher duties, and other policies that do not necessarily link to trade, but fiscal matters and investments, were also at play.

She indicated that tariffs could have a negative impact on economic growth, while the "net impact on inflation is less than clear at this point in time."

Some of the factors at play could settle by the ECB's June meeting, but others would take longer to become more certain, she said.

— Sophie Kiderlin

Assessing the current level of monetary policy restrictiveness is "meaningless," ECB President Christine Lagarde said during a press conference.

Her comments after the ECB Governing Council removed a line characterizing the level of restrictiveness of monetary policy from its statement. Ahead of the ECB's decision, analysts and economists had been considering if, and how, the Governing Council would change its wording around this in its statement.

"While that assessment of the restrictiveness was meaningful, or made sense, to the extent that we were very far away from the destination, it is meaningless at this point in time," Lagarde said.

"Meaningless because assessing restrictiveness relies heavily on the comparison between the policy rates and the neutral rate," she said.

The concept of the neutral rate works for a world free of shocks, Lagarde said, suggesting that this did not match the current environment.

"So, that assessment of the restrictiveness is not operative anymore and what we need to do is to determine the appropriate monetary policy stance that will actually take us to our destination," which is the ECB's 2% inflation target, she said.

— Sophie Kiderlin

The ECB's decision to cut interest rates by 25 basis points was unanimous, the central bank's President Christine Lagarde told CNBC's Annette Weisbach during a press conference.

"Options were debated but there was no one to argue in favor of a 50 basis point cut for instance," Lagarde said. "25 basis points was definitely the rate cut on which all in the room agreed," she added.

— Sophie Kiderlin

ECB President Christine Lagarde said in a press conference that the economic outlook was "clouded by exceptional uncertainty."

"Euro area exporters face new barriers to trade although their scope remains unclear. Disruptions to international commerce, financial market tensions and geopolitical uncertainty are weighing on business investment," she said.

Consumers meanwhile could also become more cautious regarding spending, Lagarde said.

But, "the euro area economy has been building up some resilience against the global shocks," she said, noting that the economy likely grew in the first quarter of 2025.

— Sophie Kiderlin

The ECB's 25 basis point interest rate reduction was "an insurance cut Lagarde-style," ING's global head of macro Carsten Brzeski said in a note.

"Given the high level of uncertainty currently, 50bp might indeed have been a bridge too far today – but to some extent, today's rate cut decision is also an insurance cut," he said. "Today's cut won't do any harm," he added.

Keeping rates unchanged meanwhile could have raised questions about whether the ECB was willing to bolster growth, and would have prompted "a further and unwarranted strengthening of the euro," Brzeski said.

— Sophie Kiderlin

The ECB on Thursday said that "especially in current conditions of exceptional uncertainty" the central bank's Governing Council would "follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance."

Decisions would be based on the council's expectations for the inflation outlook given economic and financial data, as well as underlying inflation dynamics and the strength of monetary policy transmission.

"The Governing Council is not pre-committing to a particular rate path."

— Sophie Kiderlin

Euro zone bond yields pared gains shortly after the interest rate cut announcement, with Germany's 10-year yield — the benchmark for the bloc — just below the flatline after earlier gains of more than one basis point.

Yield moves were largely muted following their recent spell of volatility spurred by tariffs. The German 2-year dipped to the flatline from a gain of three basis points. France's 2-year yield was nearly one basis point higher, slightly below earlier gains, while its 10-year yield also fell flat.

"All else equal, the ECB believes monetary policy will need to be more accommodative than previously expected," Andrew Kenningham, chief Europe economist at Capital Economics, said in a note.

The ECB on Thursday warned that trade tensions have weakened the outlook for economic growth.

"The euro area economy has been building up some resilience against global shocks, but the outlook for growth has deteriorated owing to rising trade tensions," the central bank said in its monetary policy statement.

"Increased uncertainty is likely to reduce confidence among households and firms, and the adverse and volatile market response to the trade tensions is likely to have a tightening impact on financing conditions. These factors may further weigh on the economic outlook for the euro area."

— Sophie Kiderlin

The ECB on Thursday cut interest rates by 25 basis points, as was widely expected ahead of the decision.

Markets had been pricing in an around 94% chance of such a cut, and an around 6% chance of a bigger, 50 basis point reduction.

This takes the central bank's deposit facility rate, its key rate, to 2.25% — down from highs of 4% in mid-2023.

— Sophie Kiderlin

The Euro was last lower against the U.S. dollar just after midday in London, as markets looked ahead to the ECB's interest rate decision.

At 12:33 p.m. London time, the euro was down around 0.3% against the greenback.

Euro/dollar

In the aftermath of sweeping U.S. tariffs initially coming into effect, the euro had strengthened, while the dollar declined, which caught many investors offguard.

— Sophie Kiderlin

Stoxx 600

Regional bourses were also widely in negative territory, with Germany's DAX down 0.6%, the French CAC 40 falling 0.8% and Italy's FTSE MIB trading 0.5% lower.

— Sophie Kiderlin

Lower growth expectations have been a key factor in shifting market pricing toward an interest rate cut from the ECB, Jens Eisenschmidt, chief Europe economist at Morgan Stanley, told CNBC on Thursday.

"Of course the clear catalyst has been here the lower growth expectation coming out of April 2nd's announcement related to the U.S. tariffs," he told Julianna Tatelbaum.

An unexpected exchange rate reaction was also a factor, he added.

"More tariffs were previously associated with a lower value of the euro, hence inflationary. The opposite has happened and of course that has contributed to an expectation for the cut."

Eisenschmidt said he does not believe the ECB would make any big changes to the wording of its closely watched policy statement as there are no new projections and a lot of uncertainty.

"Right now in that situation probably you're well advised not touching in particular references to policy being still restrictive," he said.

— Sophie Kiderlin

An interest rate cut from the ECB is being fully priced in by markets. But the rate decision is not the only thing they will be paying attention to on Thursday.

"More importantly for markets will be the extent to which the central bank decides to communicate what it perceives to be the "neutral rate," and whether monetary policy could turn accommodative – i.e. go below the neutral rate – in the next six to 12 months," Julien Lafargue, chief market strategist at Barclays Private Bank, said in a note Thursday.

But, he added, it may be too soon for the ECB to share a solid stance on that, given the ongoing tariff uncertainty.

"Another area of focus will be the euro, given the recent appreciation of the single currency," Lafargue added. That could "help" in terms of inflation, he explained, but could be a downside risk for economic growth.

— Sophie Kiderlin

The European Central Bank is widely expected to trim interest rates for the third time this year as global tariff tensions and uncertainty threaten the euro zone's economic growth.

A quarter-point cut would take the ECB's deposit facility rate, its key rate, to 2.25% — down from a high of 4% toward the middle of 2023.

The series of relatively fast-paced interest rate cuts have played out as inflation in the euro area has consistently sat below 3%, recently closing in on the ECB's 2% target. Regional economic growth has, meanwhile, been lackluster.

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— Sophie Kiderlin