ECB Holds Rates Steady Amid Trade Uncertainty

ECB Pauses Rate Cuts Amid Global Economic Concerns

The European Central Bank (ECB) decided on Thursday to hold its key interest rate unchanged at 2%, awaiting clearer signals on the future of EU-US trade relations. This decision was widely anticipated by economists, as ECB President Christine Lagarde signaled last month that the bank was “close to being done” with its latest rate-cutting cycle, strongly hinting that policymakers would shift to a “wait-and-see” strategy.

The ECB emphasized its commitment to a “meeting-by-meeting” approach, refraining from pre-committing to a specific interest rate path and ensuring all decisions are based on the latest incoming data. “Domestic price pressures are continuing to ease, and wage growth is moderating,” the bank stated on Thursday. It added that the Eurozone economy “has proven overall resilient in a challenging global environment, so far,” partly due to the previous rate cuts.

The euro remained relatively stable against the dollar following the announcement.

Analyzing the ECB's Decision

The ECB’s decision on Thursday marks the first time in a year that the bank has not lowered interest rates. Last month's cut was the seventh consecutive adjustment since the central bank and last September, bringing rates to their lowest level since December 2022.

In June, the Eurozone’s annualized inflation rate had fallen to the ECB’s medium-term target of 2%.

Following Thursday's statement, traders still anticipate another 25-basis-point rate cut in the second half of the year, bringing the rate down to 1.75%, according to levels implied by swap markets.

Joe Nellis, an economic advisor at MHA, stated in a note to clients that the ECB’s decision to pause further rate cuts was a prudent move. He pointed out that the ECB's reference in its statement to the uncertainty caused by global trade disputes suggests policymakers might indeed cut rates again in September. “Nonetheless, we are now 'almost' at the ECB’s terminal rate, which is a prudent and sensible approach.”

US-EU Trade Tensions

U.S. President Donald Trump threatened this month to impose “reciprocal” tariffs of 30% on EU imports starting August 1 if trade negotiations failed.

However, according to sources familiar with the matter, the trade partners are nearing a deal that would impose tariffs of 15% on European goods heading to the U.S.

The EU has emphasized that its priority is to negotiate an agreement with Washington but has also been preparing counter-measures to deploy should negotiations fail. Such moves could push up inflation and hinder growth in the currency bloc.

Focus Shifts to Lagarde’s Press Conference

Market focus now shifts to President Lagarde’s press conference later, where she is expected to face intense questioning about the likelihood of further rate cuts, the strength or weakness of the euro exchange rate, and the impact of tariffs.

Analyst William Horobin noted that the ECB’s short statement did convey a signal of increased confidence in the economic situation. The statement said that, under global challenges, “the economy has proven overall resilient so far,” whereas in the last meeting, this “resilience” was more of an expectation for the future. At that time, the ECB said that higher real incomes, a robust labor market, and favorable financing conditions “should underpin the resilience of the economy.” This will likely be a key point of discussion at Lagarde’s upcoming press conference.