European Central Bank reaffirms data-dependent rate setting and estimates US 25% tariffs could cut euro area growth by up to 0.5 percentage points

At a European Parliament hearing, European Central Bank President Christine Lagarde updated on the euro area outlook and the ECB’s monetary policy stance, and set out ECB analysis of how a shift in United States trade policy could affect euro area growth and inflation. She pointed to disinflation progressing broadly as expected, noted that the ECB has cut key interest rates by 25 basis points, and reiterated a data-dependent, meeting-by-meeting approach with no pre-commitment to a specific rate path. The ECB staff projections foresee GDP growth of 0.9% in 2025, 1.2% in 2026 and 1.3% in 2027, with headline inflation averaging 2.3% in 2025, 1.9% in 2026 and 2.0% in 2027, and inflation around the 2% target from the first quarter of 2026. Following the latest cut, the deposit facility rate stands at 2.50%, which Lagarde described as making policy meaningfully less restrictive, with cheaper new borrowing and loan growth picking up while overall lending remains subdued. On trade, ECB analysis suggests a US tariff of 25% on imports from Europe would lower euro area growth by about 0.3 percentage points in the first year, rising to about 0.5 percentage points with EU retaliation; near-term inflation could rise by around 0.5 percentage points due to retaliatory measures and a weaker euro, before easing in the medium term as activity slows. Lagarde said the ECB will continue to monitor global trade developments and factor them into monetary policy deliberations, and that analysis and communication on policy in an uncertain environment are being explored further as part of the ECB’s ongoing strategy assessment.