The ECB cuts rates again in the face of the US trade war.

BarcelonaTwo weeks after US President Donald Trump unleashed the tariff machinery that has dynamited markets around the world, the European Central Bank (ECB) met this Thursday with the aim of calming tensions and addressing the uncertainty generated by the trade war. As expected, the institution chaired by Christine Lagarde announced a further cut in interest rates of a quarter of a percentage point, to 2.25%. This is the sixth consecutive rate cut since the banking institution initiated this trend last June.

However, the context now is very different from what it was then. The global economy has been conditioned by the trade tensions caused by Trump, which have fueled uncertainty in the markets, and a devaluation of the dollar that strengthens the ECB's monetary policy. The organization notes that inflation in the eurozone has moderated, as has core inflation—which does not take into account fresh produce and fuel, which are the most volatile products—and is confident, according to the statement issued this Thursday, that the 2% target, the organization's target, will be reached in the medium term. Lagarde said that in Frankfurt they must be "prepared for the unforeseeable" in order to act with "agility" and determination. In fact, the Frenchwoman avoided saying that the "peak" of tensions has already been reached. "We meet every six months. Think of the changes that have occurred in the last six weeks," she admitted.

However, regarding the new economic environment unleashed by Trump, the ECB assures that "growth prospects have deteriorated due to the increase in trade tensions." Thus, inflation control takes a backseat, and it is the global context and the uncertainty generated by the trade war that will mark the ECB's next monetary policy decisions. "The escalation of global trade tensions and the associated uncertainty will likely reduce eurozone growth, because [the tariffs] will negatively affect exports," Lagarde said at the press conference.

In the statement, the European body affirms that "despite the uncertainty," it will continue to apply a "data-driven" approach, and that it has the tools to "counteract unjustified and disorderly market dynamics that constitute a serious threat to the transmission of monetary policy." "Wage growth is moderating, and profits are partially cushioning the impact of still-high wage increases on inflation," the agency said. However, Lagarde was more cautious about the impact the trade war may ultimately have on inflation. "We still have a lot of uncertainty today, and there will be many decisions and implementations of these decisions in the coming weeks and months that will be decisive in determining whether things go in one direction or another," Lagarde said.

Away from the Fed

According to the organization, greater uncertainty could undermine household and business confidence, and the "adverse and volatile" market response to trade tensions is likely to lead to a tightening of financing conditions. "Eurozone exporters face new barriers to trade, the extent of which remains unclear. Disruptions in international trade, tensions in financial markets, and geopolitical uncertainty are negatively affecting business investment, and consumers, who are more cautious about the future, could also cut back on spending."

However, the ECB remains firm in its strategy and is increasingly distancing itself from the Federal Reserve, the US central bank. During the press conference, Largarde also defended his American counterpart, Jerome Powell, for whom she said she has great professional respect. "We have a stable and solid relationship between central banks, and that relationship is decisive," Lagarde emphasized after Trump's criticism of Powell. The ECB president stated that in the past the Fed and Frankfurt have shown they can work together and that they will continue to do so "determined and unchanged." This ECB decision comes shortly after Powell issued a stark warning about the effects of Trump's new tariff policy on inflation and employment.