European central banks cut rates as Trump tariffs hit growth while Fed holds

Central banks across Europe moved in near unison this week, cutting interest rates to shore up economies that are losing momentum under the weight of US tariffs. The Swiss National Bank took its policy rate to zero, the Riksbank lowered its key rate to 2.0%, and Norges Bank delivered its first cut in five years. Those decisions followed the European Central Bank's eighth reduction in a year and the Bank of England's May easing. The Federal Reserve, by contrast, left its target range at 4.25% to 4.50%, with Chair Jerome Powell warning that tariffs will push inflation higher and require rates to stay restrictive for longer.

The Fed's inflation dilemma

Powell was explicit about the divergence. "Everyone that I know is forecasting a meaningful increase in inflation in coming months from tariffs because someone has to pay for the tariffs," he told reporters after the Federal Open Market Committee meeting. The Fed's updated projections show higher inflation in both 2025 and 2026, and policymakers signalled that the policy rate will need to remain a little higher for longer as a result. Powell stressed that the US economy is still expanding at a decent pace and that unemployment, at 4.2%, is low enough to allow the central bank to wait before acting.

That patience has infuriated President Trump, who has escalated his attacks on the Fed chair. "We have a stupid person, frankly, at the Fed," Trump told reporters outside the White House on Wednesday. "We have no inflation. We have only success. And I'd like to see interest rates get down." He warned that he "may have to force something" if the Fed does not move soon, raising fresh questions about the independence of the US central bank.

Europe's export shock

The transmission mechanism in Europe looks different. The immediate impact of Trump's "Liberation Day" tariff announcement on 2 April has been felt in export industries. Companies rushed to ship goods to the United States before duties took effect, creating a temporary surge that is now giving way to a prolonged lull in repeat orders. All five European central banks have cut their growth forecasts in recent weeks, citing trade uncertainty as the primary drag on confidence and activity.

"The economic recovery that began last year has lost momentum," the Riksbank said on Wednesday as it cut by a quarter-point. The Swiss National Bank echoed that assessment the following morning: "Following a strong first quarter, growth is likely to slow again and remain rather subdued over the remainder of the year." Norges Bank, which had held out against any easing since the post-pandemic inflation surge, said the time had finally come to shift stance and indicated it would probably cut again before year-end.

Currency dynamics and imported disinflation

A powerful disinflationary force is working in Europe's favour: the dollar has lost nearly 9% against the euro, pound and Swiss franc since the start of 2025. Because commodities from oil to coffee are priced in dollars, the weaker greenback makes imports significantly cheaper in local currency terms. "Due to the erratic and chaotic new policy style in the US, we have seen stronger European currencies," said Carsten Brzeski, chief eurozone economist at ING, calling them an "important driver for disinflationary pressures in Europe."

The effect is already visible in the data. Swiss inflation turned negative in May at -0.1% year-on-year. The ECB's latest projections see euro-area inflation at 1.6% in 2026, below the 2% target, before a gradual return to target in 2027. That undershoot gives European policymakers room to ease that their American counterparts do not have.

Switzerland's safe-haven challenge

The Swiss National Bank's cut to zero was aimed directly at the franc's safe-haven status. Global investors have been buying francs as a refuge from US policy volatility, pushing the currency up and threatening to choke off the very inflation the SNB wants to sustain. Chair Martin Schlegel acknowledged at his press conference that he may even have to cut the key rate below zero again, although he added: "We will not take the decision to go negative lightly." The SNB last used negative rates between 2015 and 2022.

Norway breaks a five-year hold

Norges Bank's move was the most striking of the week. Norway's central bank had kept its policy rate unchanged since the post-pandemic tightening cycle, relying on the country's oil wealth and a relatively closed economy to weather the inflation storm. But the combination of weaker global demand, a stronger krone and the same tariff uncertainty that afflicts the rest of Europe forced a reassessment. The bank said it would probably cut again in the course of the year, aligning its path with the broader European easing cycle.

Bank of England and ECB signal more to come

The Bank of England left its bank rate at 4.25% on Thursday, but Governor Andrew Bailey made clear the direction of travel: "Interest rates remain on a gradual downward path." The MPC had already cut in May, and markets price further reductions before the end of 2025. The ECB, having cut for the eighth time in a year earlier in June, faces a more divided governing council. While analysts expect additional easing, several rate-setters have publicly questioned whether the cutting cycle is nearing its natural limit.