Interest rate decision: ECB should send a strong signal to the economy

“The expected interest rate cut is not a game changer for the weakening economy in the Eurozone,” says Lena Dräger, Research Director of the Monetary Macroeconomics Group at the Kiel Institute. “Rather, the central bank is continuing its previous policy of gradually returning to a normal interest rate level following the significant decline in inflation since its peak in mid-2023. However, the US government's erratic tariff policy has greatly increased the economic risks for the Eurozone, which is why a larger interest rate cut of 50 basis points would be appropriate.”

The inflation rate in the Eurozone has recently further declined and stood at 2.2 percent in March 2025, close to the ECB's target of 2 percent. Individual groups of goods such as food and services recorded higher rates of price increases. However, given the weak global trade and continued low investment momentum in the Eurozone, the economic situation remains fragile. Germany in particular remains a cause for concern with slightly negative growth rates.

Julian Hinz, Research Director of the Trade Policy Group at the Kiel Institute, points to the global risks: “The escalation of the trade war between the US and China has greatly increased the risks for the real economy and financial markets worldwide. Although the US tariffs of 10 percent on most EU products announced recently fall short of earlier threats, this tariff rate is still almost five times higher than before.”

This is currently leading to a strong Euro and possibly an increase in cheap imports from China to Europe. Both would reduce inflation in the Eurozone. A simulation of the effects of tariffs on trade flows using the KITE model at the Kiel Institute shows that tariffs of up to 145 percent on almost all US imports from China and 10 percent on all other trading partners could reduce consumer prices in the Eurozone by 0.2 to 0.4 percent. According to the simulation, the effects would be more pronounced in China and the US, where prices would fall by 2.7 percent and rise by around 5.5 percent, respectively.