ECB Lowers Interest Rates to 2.5% but Remains Vigilant Amid Potential Disruptions from Trump

While the United States embraces uncertainty with the decisions of its unpredictable president, Donald Trump, the European Central Bank (ECB) continues its path of interest rate reductions. This Thursday, the Eurobank lowered the cost of money by 25 basis points to 2.5%—its lowest level since February 2023. However, at the same time, the institution led by Frenchwoman Christine Lagarde keeps a wary eye on Washington and the ripple effect the Republican leader will have on the European economy, with the tariffs on European products and the end of economic and military aid to Ukraine.

The levies on European products could have 'a strong impact' on the economy, as warned by ECB Vice President Luis de Guindos, and Europe's rearmament plan and the boost in aid to Kiev will require significant expenditure. All this is happening in an economic context where the eurozone still shows no economic growth. The good news is that inflation is beginning to approach its 2% target (it recorded 2.4% in February, according to Eurostat data).

However, uncertainty has settled in the markets with Trump's policies, which threaten to disrupt the global economy and against which the ECB might choose to pause its interest rate cuts. Divisions within the Governing Council are also growing, with hawks pushing for a pause in cuts because inflation is still too high and monetary policies are weighing down the economic activity of eurozone countries.

Meanwhile, the market is focused on Lagarde's appearance from 2:45 PM, as any change in the language of the president of the community institution could provide clues about the ECB's next steps. The key lies in whether the institution will continue to describe its monetary policy as 'restrictive.' If it does, it could maintain the pace of 25 basis point cuts. If it removes that label in its statement, the ECB might be signaling an imminent pause.