Europe cuts interest rates as Trump’s tariffs loom

The European Central Bank (ECB) has cut its key interest rate for the eighth time in just over a year as it warned about continuing pressure on the eurozone from Donald Trump’s tariffs.

The main rate has been reduced from 2.25% to 2% by the ECB, which sets rates for the countries that use the euro.

While inflation has eased across the eurozone, the economy has been sluggish even before the US president rolled out his aggressive tariff policy which has prompted threats of retaliatory taxes from the wider European Union.

The ECB said that, in the short-term, “uncertainty” surrounding trade “would weigh on business investment and exports”.

“Stronger-than-expected” economic growth of 0.3% between January and March may weaken as the year goes on, the central bank said.

On Wednesday, Trump doubled tariffs on EU steel and aluminium imported to the US from 25% to 50%.

Trump has paused the taxes on other European goods sold to the US until 9 July as talks to reach a deal continue but a 10% tariff remains in place until then.

Meanwhile, the EU has drawn up its own list of tariffs on €21bn-worth of US goods.

However, the ECB expects the economy will gather pace in the medium-term, boosted by European spending on defence and infrastructure.

Nato is pushing for members of the military alliance to commit more funding to shore up defence in Europe as Russia continues to wage a war on Ukraine.

Recent figures showed that inflation across the 20-member eurozone had fallen below the ECB’s 2% target, easing to 1.9% in April.

Inflation is expected to stay around the target between 2025 and 2027.

ECB president Christine Lagarde said on Thursday that higher incomes and a “robust” employment market “will allow households to spend more”.

She said this would help “make the economy more resilient to global shocks”.

However, she admitted that a great deal of uncertainty remain over the economy, in large part due to trade policies.

Germany’s Chancellor Friedrich Merz will meet Trump in the White House on Thursday where they are expected to discuss tariffs as well as defence spending.

The pace of the ECB’s rate cuts has drawn praise from Trump while provoking his anger at the US Federal Reserve and its chair Jerome Powell.

On Wednesday, figures from payroll firm ADP revealed that hiring by US firms in May fell to its lowest level in more than two years. Recent figures have also indicated that the US economy shrank in the first three months of 2025.

On Wednesday, Trump wrote on social media: “ADP NUMBER OUT!!! “Too Late” Powell must now LOWER THE RATE. He is unbelievable!!! Europe has lowered NINE TIMES!”

At the time, the ECB had cut interest rates seven times in its latest cycle.

The US Fed has reduced the key interest rate three times.

At the last rate-setting meeting, when the Fed voted to hold, Mr Powell said the economic fallout from Trump’s tariffs meant it was “not at all clear” what the bank should do next.

He said if Trump’s tariff policies remained in place they were likely “to generate a rise in inflation, a slowdown in economic growth, and an increase in unemployment”.

Official US employment statistics are due out on Friday. Economists are forecasting that the US added 130,000 jobs in May, down from 177,000 in the previous month.

The unemployment rate is expected to hold steady at 4.2%.