European Central Bank Cuts Rates as Trade War Weighs on the Economy

It was the eighth rate cut in the past year, extending the bank’s divergence from the Federal Reserve, which has held rates steady since the end of last year.

The European Central Bank cut interest rates on Thursday to their lowest level in two and a half years, as uncertainty caused by President Trump’s trade war is expected to slow Europe’s economic recovery and reduce inflation.

The decision reflects a divergence between the central banks in Europe and the United States, where the Federal Reserve has held rates steady since December.

The European Central Bank’s policymakers, who set rates for the 20 countries that use the euro, lowered the key rate to 2 percent. It was the eighth cut in the past year as officials have sharpened their focus on the region’s weak economy and grown confident that inflation is under control.

The average rate of inflation in the eurozone slowed to 1.9 percent in May, just below the central bank’s 2 percent target, data published this week showed. Christine Lagarde, the president of the bank, said on Thursday that the bank’s policy was now in “a good position” to navigate the economic uncertainty, which dampened traders’ bets on further rate cuts.

But Ms. Lagarde also warned in a news conference in Frankfurt that the “volatile global trade policy environment” was making the outlook for inflation “more uncertain than usual.”

Mr. Trump’s erratic trade policy has caused disarray in the global economy as his tariff threats jolt investors, businesses and political leaders. Last month, he said he would raise tariffs on goods from the European Union to 50 percent, then paused the decision until early July to allow for negotiations to continue.

The pace of rate cuts in the eurozone over the past year is a sign of the varying economic impact that Mr. Trump’s tariff policies are having so far around the world.

In the United States, Federal Reserve officials have shown a willingness to wait for more clarity on the Trump administration’s policies, from trade to taxes, before cutting rates again, nervous about stoking inflationary pressures. In Europe, where recent economic growth has been sluggish, economists expect the Trump administration’s policies to lower prices, in part because of concerns that cheap goods from countries like China that usually head to the United States would be redirected to Europe.

In a digression from monetary policy during Thursday’s news conference, Ms. Lagarde pushed back on reports that she was planning to leave the central bank early to head up the World Economic Forum, which hosts an annual conference in Davos, Switzerland. The former head of the organization, Klaus Schwab, had said he was courting her for the role, before he was pushed out early.

“I can very firmly tell you that I have always been and am fully determined to deliver on my mission,” Ms. Lagarde said. “And I am determined to complete my term.” Her eight-year term ends in late 2027.

By then, inflation in the eurozone is expected to return to central bank’s 2 percent target, after falling to 1.6 percent in 2026.

The European Central Bank lowered its inflation forecasts because of lower energy prices and a stronger euro, which makes imports cheaper. The euro has gained more than 10 percent against the dollar this year, bolstered by investors who have been spooked by Mr. Trump’s policies and turned to the euro as a safe alternative.

The bank also said that uncertainty around trade policy was expected to weigh on the economy this year and next by dampening business investment and exports. But it expected an increase in government spending in the region, particularly on defense, to help support the economy in the medium term.

Growth is predicted to be 0.9 percent this year as a stronger-than-expected start to the year will offset a weaker outlook for the coming months. The bank slightly lowered its forecast for the bloc’s growth next year to 1.1 percent.

Analysts and traders do not expect the European Central Bank to lower rates much more this year. At 2 percent, rates are seen as roughly neutral, neither restricting the economy to bring down inflation nor actively stimulating it. Before Ms. Lagarde’s news conference, traders were betting on one more rate cut in September, but those bets have faded.

Still, these expectations depend on whether trade tensions escalate. If higher tariffs are reinstated and the European Union retaliates, that could weaken the economy further and encourage more rate cuts. But some policymakers, including Isabel Schnabel, an executive board member, have said there are risks of rising inflation as global supply chains absorb the cost of higher U.S. tariffs, which would warrant the central bank to hold rates.

“Especially in current conditions of exceptional uncertainty,” Ms. Lagarde said, future decisions will be made depending on data at the time of each meeting. “We are not pre-committing to a particular rate path.”