The European Central Bank (ECB) held interest rates steady on Thursday, ending a streak of seven consecutive cuts as policymakers wait for greater clarity on Europe’s trade relationship with the United States.
Over the past year, the ECB had lowered its benchmark rate from a record 4% to 2%, but with inflation now hitting the bank’s 2% target, officials opted to pause. ECB forecasts suggest inflation could fall below target over the next 18 months.
Markets are now watching closely as the Trump administration approaches an August 1 deadline to potentially impose new tariffs on the European Union, including eurozone nations. According to the Financial Times, a 15% tariff deal between the U.S. and EU—similar to a recent U.S.-Japan agreement—may be close. However, Brussels is also preparing a €93 billion ($109 billion) retaliatory tariff package, with rates up to 30%, in case negotiations fall through.
The uncertain state of U.S.-EU trade talks has complicated monetary policy decisions. With the eurozone economy showing minimal growth, any new tariffs from Washington could further suppress activity. As a result, investors now anticipate the ECB may cut rates again before year-end, likely in Q4.
Analysts at ING noted, “While policymakers say monetary policy is in a ‘good place’ due to soft inflation, they seem comfortable with markets pricing in just one more rate cut this year.”
Earlier Thursday, new data offered some encouragement: eurozone business activity picked up more than expected, driven by gains in the services sector. Still, ECB President Christine Lagarde warned that risks remain tilted to the downside. She pointed to ongoing global trade tensions as a potential threat to exports, investment, and consumer spending.
Lagarde emphasized that the ECB is not locked into a fixed rate path, but is ready to act as needed to maintain price stability and keep inflation anchored around the 2% medium-term goal.
