The European Central Bank is expected to hold interest rates steady on Thursday after seven consecutive rate cuts as it assesses ongoing uncertainty around Europe’s trade relationship with the United States. Analysts anticipate the central bank will resume cutting rates in either September or December.
Concerns over U.S. tariffs and their impact on the eurozone economy are seen as key reasons behind the central bank’s decision to adopt a cautious, wait-and-see stance for now.
Tariff risks prompt wait-and-see approach
Over the past year, the European Central Bank has cut its policy rate in half from 4 to 2 percent after successfully bringing inflation under control following the post-COVID-19 surge and the economic fallout from Russia’s invasion of Ukraine.
With inflation now at the bank’s 2 percent target, policymakers are expected to hold interest rates steady this week as they monitor potential trade actions by President Donald Trump’s administration, particularly any tariffs that may be imposed on the European Union after the August 1 deadline.
Peter Vanden Houte, chief economist at the ING Group, said the ECB’s monetary policy is “in a good place now” and is not restrictive anymore.
“However, the latest economic developments seem to suggest some deflationary pressure: the euro has seen a substantial appreciation since the beginning of the year; at the same time, higher than expected U.S. import tariffs on European goods might kill the timid recovery in the European manufacturing sector — this would plead for some additional stimulus,” he said.
Houte also noted that the European Central Bank considered medium-term inflation risks, as inflation may rise again in Germany next year with significant fiscal stimulus measures.
EU-U.S. trade deal in focus
The tense and uncertain trade negotiations between Washington and Brussels have complicated policy decisions. President Trump’s threat to impose a 30 percent tariff on EU exports to the United States—significantly higher than the European Central Bank’s worst-case scenario from last month—has led President Christine Lagarde and the Governing Council to consider more pessimistic forecasts for growth and inflation.
However, two diplomats indicated on Wednesday that the EU and U.S. are moving toward an agreement that would set a more moderate, broad tariff of 15 percent on European goods.
“All things considered, a wait-and-see approach remains the most probable course of action for the European Central Bank. With the next potential tariff escalation not expected until Aug. 1, there’s little reason for a preemptive rate cut now. At the same time, the strengthening of the euro since the last meeting has not been strong enough to justify a rate cut,” Houte added.
Meanwhile, Hadrien Camatte, senior economist for France, Belgium and the eurozone at Natixis, said that the European Central Bank is “well positioned” to assess the current environment and the risks in the uncertain atmosphere.
“Given the upcoming data by September, we believe that the ECB will have enough information to proceed with a new and final rate cut in next September — we attach a probability of 20 percent to the adverse scenario, paving the way to another 25 basis point policy rate cut at the December meeting should the 30 percent US tariffs be applied, and the European retaliatory measures be not proportioned,” he said.
