The European Central Bank (ECB) and the Swiss National Bank (SNB) have taken decisive steps towards monetary easing, signaling a dovish turn intended to mitigate potential economic headwinds stemming from a second Trump presidency. These actions reflect growing concerns about the impact of trade tensions, geopolitical uncertainty, and currency volatility on the European economy.
ECB President Christine Lagarde addresses the media.
Both central banks implemented interest rate cuts on Thursday. The SNB surprised markets with a half-point reduction, bringing its benchmark rate to 0.5%, a level unseen since September 2022. This move represents a significant reversal of previous tightening measures and underscores the SNB’s commitment to supporting economic growth. The ECB, meanwhile, lowered its rate by a quarter-point to a 1 1/2-year low. ECB President Christine Lagarde indicated a clear intention for further easing, with similar cuts potentially on the horizon in January and March.
Following the ECB and SNB’s lead, the Danish central bank also reduced borrowing costs. This coordinated response highlights the shared concerns among European policymakers about the potential negative consequences of Trump’s return to the White House.
With these decisions marking the final scheduled policy adjustments before Trump’s inauguration in January, the focus has shifted from lingering inflationary pressures to concerns about economic growth and the risk of deflation. The prioritization of growth over inflation control reflects a prevailing sense of unease about the potential for disruption under the new US administration.
Allianz Chief Economist Ludovic Subran characterized the current trajectory of European interest rates as unequivocally downward, emphasizing the uncertainty surrounding the extent of future easing. The ECB, in particular, may face pressure to accelerate and deepen its rate cuts beyond current expectations.
Concerns related to the upcoming US presidential transition extend beyond Europe. The Bank of Canada, anticipating potential trade tariff increases under Trump, also implemented a half-point rate cut. In contrast, the Brazilian central bank responded to recent currency volatility and fiscal challenges with a 100 basis point rate hike, influenced in part by Trump’s assertive stance on the US dollar’s global dominance.
The SNB’s decision was particularly motivated by currency concerns. The Swiss franc, often perceived as a safe haven asset during periods of geopolitical instability, has experienced renewed speculative pressure. SNB officials have signaled their readiness to further lower rates, intervene in currency markets, and even reintroduce negative interest rates if necessary to counter this trend.
The ECB, in addition to its rate cut, modified its policy statement to remove language suggesting a desire to restrict the economy. The central bank also significantly downgraded its growth projections for 2024-2026, now forecasting eurozone economic expansion of just 1.1% in 2025, down from a previous estimate of 1.3%.
Graph showing projected economic growth.
While significant uncertainty remains about the economic outlook for 2025, the coming months may offer some clarity as the new Trump administration takes shape and its policies become clearer. Both Lagarde and SNB chief Martin Schlegel expressed hope for clarification in the near future, emphasizing the importance of open markets and free trade for the European and Swiss economies.
However, the arrival of Trump may exacerbate existing challenges. The combination of domestic economic struggles and the threat of new trade tariffs presents a formidable obstacle for European policymakers. As central banks navigate this complex landscape, their dovish stance reflects a proactive approach to mitigating potential risks and supporting economic stability.
