Pause in ECB rate cuts anticipated amid uncertainty and steady inflation

Inflation across the eurozone crept up marginally in June, rising to the ECB's target of 2%. (AP Photo/Bernd Kammerer, File)

The Governing Council of the European Central Bank will meet this week, with a pause in rate reductions largely anticipated after seven consecutive cuts in response to falling inflation.

Policymakers will gather in Frankfurt on Thursday to consider the performance of the 20-country eurozone amid tariff threats from US President Donald Trump and ongoing political turmoil. 

After a total eight quarter-point moves that have brought the deposit rate to 2%, ECB President Christine Lagarde said last month that the cutting cycle is nearing its end, with the bank's deposit facility now at 2%. 

Inflation across the eurozone crept up marginally in June, rising to the ECB's target of 2%, up from 1.9% a month earlier, as energy and industrial goods continued to pull down prices, offsetting quick services inflation.

Underlying inflation, a closely watched measure that excludes volatile food and fuel prices, meanwhile held steady at 2.3%, in line with expectations.

Policymakers reckon they are well-positioned to sit out the elevated uncertainty, with borrowing costs at neutral levels that neither restrict nor spur economic activity.

A key indicator of the influence rates are exerting will arrive on Tuesday with the ECB’s quarterly Bank Lending Survey, the first since Trump unveiled his levies in April.

Worried about growing risks, banks previously reported tighter credit standards; however, ECB Executive Board member Isabel Schnabel has said the last poll revealed a stimulative effect as lower borrowing costs boosted demand for mortgages.

Speaking on the upcoming decision, Daragh Cassidy on Bonkers.ie said: "After seven consecutive rate cuts, and eight in total since last June, it’s almost a given that the ECB will keep rates on hold at its next meeting.

"Inflation is now pretty much bang on target at 2%. And with the ECB’s key policy rate also at 2%, it’s close to the level that’s considered neutral for the Eurozone economy.

"However, one further rate cut later in the year is still on the cards, probably in September. But the impact of Trump’s tariffs on the Eurozone and global economy is creating huge uncertainty and making the outlook incredibly hard to forecast. 

"If the tariffs drag down Eurozone growth, or trigger a recession, the ECB could be forced to cut rates even further. We just don’t know at this stage how it’s going to all play out. But for now, the ECB is likely to keep rates on hold and adopt a “wait-and-see” approach."

Meanwhile, Michael Dowling of Irish Mortgage Brokers told the Irish Examiner: "I expect the ECB to leave interest rates on hold following Thursday's meeting. There is too much uncertainty in the market, and I expect the ECB to review rates at their meeting on September 11.

"So no good summer news for borrowers, but I expect a further decrease of 0.25% to be announced in September."