The European Central Bank (ECB) kept interest rates unchanged on Thursday, after seven straight cuts, as policymakers await further clarity on Europe’s trade relationship with the United States.
The ECB had cut its main policy rate to 2% from a year-high of 4%, but decided to pause for now as inflation has now returned to the central bank’s 2% target after a surge in prices due to the end of the COVID-19 pandemic and Russia’s invasion of Ukraine. The ECB’s own forecast shows price growth will remain below 2% for the next 18 months.
The focus is now on the level of tariffs that the Trump administration will impose on the European Union, including countries in the eurozone, by the August 1 deadline. The European Central Bank reported that the EU and the US are close to reaching a trade deal that would impose a 15% tariff on European imports similar to the Trump-Japan deal sealed this week. However, the bloc is still pushing ahead with plans to prepare a €93 billion ($109 billion) retaliatory tariff package, which could reach up to 30%, if no deal is reached by early next month.
The tense trade talks are making policymaking difficult. The eurozone economy is currently at a standstill, and the US tariffs are expected to further weigh on already weak growth, leading to market expectations of at least one more rate cut by the fourth quarter of this year. However, recent data showed that eurozone business activity expanded faster than expected, driven by a strong performance in the dominant services sector.
ECB President Christine Lagarde warned that risks to economic growth remained “biased to the downside”, particularly with the possibility of an escalation in global trade tensions that could weigh on exports, investment and domestic consumption. Lagarde also stressed that the ECB had not committed to a particular rate path, but was prepared to adjust policy to ensure inflation remained stable at its 2% target over the medium term.
