European Central Bank Cuts Interest Rates Amid Economic Slowdown
The cost of borrowing in the 20-member euro area has fallen for the third time this year as the European Central Bank (ECB) reduced its main interest rate to 2.25%. This decision comes in light of slowing economic growth and the impact of tariffs imposed by the Trump administration.
On Thursday, the ECB cut its benchmark deposit rate by a quarter of a percentage point, aligning with economists' predictions. The governing council of the ECB cited a deteriorating economic outlook due to rising trade tensions, which are likely to reduce confidence among households and firms. The adverse and volatile market response to these trade tensions could potentially tighten financing conditions, further affecting the euro area’s economic prospects.
In terms of inflation, the ECB noted that all major indicators were trending downward, allowing for a reduction in interest rates. Services inflation, which has remained stubbornly high in previous years, has seen a significant decline in recent months. Additionally, wage growth is moderating, and in instances where it is still high, companies are absorbing extra costs rather than passing them on to consumers through price increases.
The ECB added that most measures of underlying inflation suggest that it would stabilize around the medium-term target of 2% on a sustained basis. Financial markets now anticipate that central banks across major economies will reduce interest rates this year due to the pressure tariffs are placing on global trade and economic growth.
In the UK, investors expect the Bank of England to reduce borrowing costs by a quarter point during its next meeting in May, with two additional cuts anticipated in 2025. This expected monetary easing is seen largely as a reaction to the uncertainty stemming from tariffs and their negative implications for business and consumer confidence.
In the United States, Jerome Powell, the head of the Federal Reserve, expressed concerns regarding tariffs affecting around 60 countries, stating they would likely increase domestic prices and dampen hiring. Speaking at the Economic Club of Chicago, he remarked on the uncertain implications for the U.S. economy and the possibility of needing to adjust interest rates based on inflation or growth concerns, which triggered significant sell-offs on U.S. markets.
According to data released by Eurostat, inflation in the eurozone rose to 2.2% in March, down from 2.3% in February. A core inflation measure, which excludes volatile items such as food and energy, fell from 2.6% to 2.4% during the same period. This information underscores the ECB's reasoning behind its decision to lower interest rates as a proactive measure to stimulate growth amidst challenging economic conditions.
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