The European Central Bank (ECB) kept interest rates unchanged on Thursday, as expected, with inflation close to target, but the uncertain growth and political outlook leaves room for further easing.
The ECB cut its main deposit rate to 2% in June, half of a record high of 4% in a year. But since then, the bank has opted to halt its easing cycle as inflation is now just above its 2% target after a surge in prices following the end of the COVID-19 pandemic and Russia’s invasion of Ukraine.
The ECB’s latest economic forecasts will be in the spotlight. Economists generally expect a slight increase in growth and inflation forecasts for 2025, but are more divided about next year.
There are still many uncertainties for policymakers to manage. The EU’s 15% tariff deal with the Trump administration is not far off the ECB’s baseline expectation of 10%, but the actual impact on the eurozone economy is still uncertain and will become more pronounced in the coming months.
Escalating tensions are also risky as the region’s pharmaceutical companies remain in the crosshairs of US authorities. French political turmoil is another source of uncertainty, with the eurozone’s second-largest economy changing prime ministers earlier this week over unpopular austerity measures.
If markets become more stressed, there could be renewed focus on whether the ECB will buy bonds through a scheme designed to support countries with debt problems.
Against this backdrop, the ECB is not necessarily done with its rate-cutting cycle, and traders now see a roughly 70% chance of another cut, but only by summer next year.
