ECB Expected to Hold Rates as Uncertainty Over U.S.-EU Trade Relations Looms
The European Central Bank (ECB) is expected to pause its interest rate cuts on Thursday, ending a streak of seven consecutive reductions, as it waits for clarity on the evolving trade relationship between Europe and the United States.
Over the past year, the ECB has slashed its key rate from 4% to 2%, successfully cooling inflation that had surged following the COVID-19 pandemic and Russia’s invasion of Ukraine.
Now that inflation has returned to the ECB’s 2% target and is projected to remain there, policymakers are likely to adopt a wait-and-see approach this week. Economists surveyed by Reuters unanimously expect the central bank to hold rates steady, as markets watch how the Trump administration handles tariffs on the European Union after an August 1 negotiation deadline.
The volatile and tense trade negotiations between Washington and Brussels have added significant complexity to the ECB’s policy decisions.
President Donald Trump’s threat of imposing a 30% tariff on EU exports—far exceeding the worst-case scenario modeled by the ECB—has prompted ECB President Christine Lagarde and the Governing Council to revise expectations for growth and inflation downward.
However, sources close to the talks said a compromise deal is emerging that would apply a 15% tariff on EU goods—more aligned with the ECB’s baseline projections.
“If such a deal is finalized, it supports our view that the eurozone could regain economic momentum by Q4, and that further rate cuts may not be necessary,” said Holger Schmieding, economist at Berenberg.
Recent trade deals with other nations provide potential models: Japan secured a 15% tariff, Indonesia 20%, and the UK—which has a trade deficit with the U.S.—managed 10%.
Still, as BNP Paribas economist Paul Hollingsworth noted, tariff rates now appear likely to be higher and more uneven across countries than the previously assumed flat 10%, which could reshape trade dynamics.
The ECB has warned that U.S. tariffs could dampen growth and reduce inflation unless the EU responds with countermeasures. That’s why many analysts still expect at least one more rate cut, possibly later this year, especially if inflation risks falling below target.
The eurozone economy is already experiencing stagnant growth, and while firms remain cautiously optimistic, profit margins are under pressure due to tariff effects.
Even the ECB’s internal projections show inflation dipping below 2% over the next 18 months, increasing the chances of undershooting the target.
“By year-end, inflation could fall below 1.5% and stay there into 2026,” warned Anatoli Annenkov of Société Générale. “That raises the risk of declining inflation expectations, which could force the ECB to act to stabilize sentiment.”
At the same time, loan demand has picked up, and despite trade-related uncertainties, financial markets and the broader economy have remained resilient.
European stock markets have shrugged off April’s brief selloff and are now approaching record highs—helped in part by Germany’s increased fiscal spending.
Interestingly, political instability and aggressive rhetoric in the U.S., including Trump’s frequent attacks on the Federal Reserve, have driven foreign capital into eurozone assets, temporarily pushing the euro to a 3-year high of $1.1829 earlier this month.
While ECB hawk Isabel Schnabel has warned that tariff-related price increases could limit the scope for further cuts, other policymakers are wary that a stronger euro may hurt exports and further suppress inflation.
“Expect Christine Lagarde to reassure markets that while the ECB doesn’t target exchange rates, it stands ready to act if currency strength results in inflation falling too far,” said Julien Lafargue, Chief Market Strategist at Barclays Private Bank.
