ECB cuts rates to 2.25%, warns trade tensions weigh on economic outlook

Cutting 25 Basis Points, Interest Rate Drops to Near Two-Year Low

The European Central Bank announced on Thursday as expected to cut interest rates by 25 basis points, lowering the deposit facility rate from 2.5% to 2.25%. This is another significant turning point since the interest rate reached a high of 4% in mid-2023.

According to LSEG data, the market had already fully reflected the possibility of a rate cut before the decision was announced, with a 94% probability of a 25 basis point cut. This also shows that the market has long been cautious about the economic growth prospects of Europe.

Trade Situation Worsens, Central Bank Hits the "Emergency Brake"

One important reason behind the ECB's rate cut this time is the impact of the recent deterioration of global trade relations. Although tariff conflicts between the US and multiple countries have eased, overall uncertainty remains high, damaging business and household confidence.

The central bank clearly stated in its statement: "Economic growth prospects have deteriorated due to escalating trade tensions." The bank also warned that continued uncertainty and market volatility could lead to tightening financing conditions, putting pressure on the overall economy.

Market Closely Watches Lagarde's Speech and Future Policy Path

The market will next focus on the press conference by ECB President Christine Lagarde, especially her response to the tariff situation and guidance on the future direction of central bank policy.

Investors are also observing whether the ECB will adjust its wording about monetary policy being "restrictive" and may reveal more clues about the "neutral rate". This is a key interest rate level that neither stimulates nor suppresses the economy.

Monetary Policy Direction in Next Six Months Becomes Key Observation Point

Although this rate cut was expected by the market, what is more worth paying attention to is whether the central bank has paved the way for a more relaxed monetary policy in the future. Julien Lafargue, Chief Market Strategist at Barclays Private Bank, noted in a report on Thursday: "More importantly, whether the central bank is prepared to let interest rates fall below the neutral rate to further stimulate the economy will be the market's focus in the next 6 to 12 months."