ECB may abandon pause in rate cuts amid escalating trade tensions

Uncertainty over US President Donald Trump's potential tariffs is overshadowing the European Central Bank's (ECB) decision on the future course of monetary policy this week. Since June 2024, the ECB has cut rates five times, signaling a potential pause in reducing borrowing costs, according to RTL experts. But Trump's tariff threats, despite the temporary reprieve, are adding to the uncertainty.

Ulrike Kastens, economist at DWS, warns that potential EU restrictions and retaliatory measures pose downside risks for the eurozone economy in 2025. This could force the ECB to continue cuts.

Inflation across the bloc edged close to the ECB’s target in March and amounted to 2.2%. As Kastens noted, the tariffs could either accelerate inflation again by raising the cost of imports or lead to disinflation, as lower global activity would cause oil prices to fall and divert cheaper goods destined for the US to Europe.

ECB President Christine Lagarde reiterated the bank’s readiness to act in a volatile environment. The institution will remain cautious in its decision-making while closely monitoring new economic data.