Towards an eighth rate cut in the face of Trump's threats

Everything suggests that the European Central Bank (ECB) will cut its interest rates once again on Thursday, in the face of increasingly serious threats of a trade war from President Donald Trump, which are further darkening the economic outlook for the eurozone.

The global economic order, based on American leadership and the predominance of the dollar, "is fracturing," ECB President Christine Lagarde said last Monday, referring to the United States' protectionist policies.

Even before the US president threatened to sharply increase tariffs on European goods , the ECB had already cut borrowing costs in response to slowing inflation in Europe. Now, concerns about the economic sluggishness in the 20-nation eurozone have gradually eclipsed fears about rising prices.

The tariffs imposed by Donald Trump have heightened the sense of urgency. Europe is in the US president's crosshairs due to its large trade surplus with the United States, fueling fears of a blow to the continent's exporters.

Forecasting a cut at the ECB's governing council meeting on Thursday, HSBC said that "the short-term outlook for the eurozone has deteriorated due to recent US tariff announcements and the resulting uncertainty."

Analysts expect another quarter-point cut, which would bring the deposit rate—the benchmark for short-term monetary policy—down to 2%. But experts believe the June cut could be the last in a series, with the ECB likely to pause at its next meeting in July, waiting to see how the economy develops.

The ECB's string of rate cuts contrasts with the US Federal Reserve's policy, which recently kept rates above 4% amid fears that Donald Trump's taxes would revive inflation in the United States. The Bank of England is following a similar policy.

To justify the expected new cut in the eurozone, the ECB will be able to rely on the latest inflation data. It came in at 2.2% in April. Data for May will be released just before Thursday's meeting, and economists anticipate a further decline that would confirm a gradual disinflation toward the ECB's 2% target.

Overall, across the 20 countries sharing the single currency, inflation has eased significantly since hitting a record 10.6% year-on-year in October 2022, at the height of the energy price surge linked to the war in Ukraine. Wage pressures are also easing. The ECB's index measuring negotiated wage growth slowed to 2.38% year-on-year in the first quarter of 2025, compared to 4.12% at the end of 2024.

The ECB is meeting in a tense environment: the US president threatened last month to impose 50% tariffs on European imports starting June 1, before postponing the fateful date to July 9 to begin negotiations. Without delay, he announced last week that the US steel and aluminum surcharge would increase to 50%, a new escalation in its protectionist offensive that the European Union "deeply regretted" on Saturday.

Christine Lagarde's career could also be discussed at Thursday's meeting of the ECB's governing council. Former World Economic Forum chief Klaus Schwab told the Financial Times last week that he had spoken with her about succeeding her as head of the organization. The ECB dismissed these rumors, saying the president was "determined" to complete her term as head of the ECB, which runs until October 2027.