European Central Bank Cuts Interest Rates Amid Trade War Fears

ECB Cuts Interest Rates, Eurozone Faces New Uncertainties

The European Central Bank (ECB) once again finds itself at the center of global attention after announcing a 0.25-point cut to its deposit rate, bringing it down to 2% on Thursday, June 5, 2025. This move marks the eighth rate cut within the past year, signaling the ECB’s aggressive response to mounting economic challenges and growing global uncertainties.

Aggressive Monetary Policy to Support Growth

The ECB’s decision to lower interest rates comes as eurozone inflation falls below the 2% target. In May 2025, eurozone inflation was recorded at just 1.9%, largely driven by falling energy prices and slowing wage growth. Meanwhile, economic growth projections for the eurozone this year have been revised down to 0.9% from the previous estimate of 1.3%. These conditions pushed the ECB to take concrete steps to support growth and maintain economic stability in the euro area.

Direct Impact of Global Trade War

The ECB’s move is inseparable from the shadow of global trade tensions. In April 2025, U.S. President Donald Trump announced new tariffs that sent shockwaves through global supply chains and further strained the European economy. Ongoing trade friction between the U.S. and China has also triggered a domino effect on the import-export activities of eurozone member states, adding more uncertainty for businesses and investors.

The ECB itself acknowledged that external risks such as trade wars are a main consideration in setting policy direction. The central bank emphasized that future decisions on interest rates would depend heavily on incoming economic data over the coming months.

A Stark Contrast With the Fed

This situation is further highlighted by the contrasting policies of the U.S. Federal Reserve (the Fed), which has chosen to keep interest rates steady despite domestic political pressure to cut. This divergence in approach underscores the dynamic nature of monetary policy between the world’s two largest economies, with the ECB opting for aggressive easing while the Fed remains cautious.

Market Response and Economic Outlook

Financial markets have responded to the ECB’s rate cut with caution. The euro’s value against the U.S. dollar weakened, while European stock indices have moved unpredictably. Many market participants expect the ECB to refrain from further rate cuts over the summer, with the possibility of more monetary easing in the autumn, depending on economic developments and geopolitical tensions.

Meanwhile, Europe’s banking sector faces the challenge of shrinking profit margins due to low rates, but businesses and the real sector are expected to take advantage of cheaper borrowing costs to spur investment and consumption.

Medium-Term Impact Analysis

Behind this policy lies hope that the rate cut will give the eurozone time to adapt to global dynamics. However, economists warn that monetary stimulus alone will not suffice if trade tensions persist. Coordinated fiscal policies from member governments and structural reforms remain necessary to achieve sustainable growth.

The ECB has reiterated its commitment to closely monitoring all economic indicators, including inflation, growth, and employment data, to determine its next moves. With global challenges remaining unpredictable, flexibility and prudence will be key to maintaining eurozone stability.