European Central Bank keeps interest rates steady as trade tensions add to outlook uncertainty
Mr Trump's threat to impose a 30% duty on EU goods exported to the US has forced ECB President Christine Lagarde and her colleagues on the Governing Council to contemplate lower outcomes for growth and inflation. (AP Photo/Michael Probst)
The European Central Bank (ECB) have kept interest rates steady following a meeting of its Governing Council on Thursday, with the pause coming after seven consecutive cuts in response to falling inflation.
After a total of 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 preparing for incoming tariffs from US President Donald Trump as negotiations between Europe and the White House draw to a close.
Mr Trump's threat to impose a 30% duty on EU goods exported to the US has forced ECB President Christine Lagarde and her colleagues on the Governing Council to contemplate lower outcomes for growth and inflation.
"The Governing Council today decided to keep the three key ECB interest rates unchanged. Inflation is currently at the 2% medium-term target," the bank said.
"The incoming information is broadly in line with the Governing Council’s previous assessment of the inflation outlook. Domestic price pressures have continued to ease, with wages growing more slowly.
"Partly reflecting the Governing Council’s past interest rate cuts, the economy has so far proven resilient overall in a challenging global environment. At the same time, the environment remains exceptionally uncertain, especially because of trade disputes."
However, two diplomats said on Wednesday the EU and the US were heading towards a deal that would result in a broad tariff of 15% applying to EU goods, an outcome lying closer to the ECB's baseline scenario than the severe possibility.
The ECB assumes that US tariffs will push down growth and, if there is no EU retaliation, inflation over the medium term.
As a result, the majority of markets and economists are still betting on at least one more interest rate cut towards the end of the year, as inflation is now at risk of going too low.
"Inflation is now pretty much bang on target at 2%," said Daragh Cassidy of Bonkers.ie. "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," Mr Cassidy concluded.
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."
Price levels 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.
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