FRANKFURT — The European Central Bank held its key deposit rate stable, as it waits for more clarity on the impact that U.S. tariffs will have on the eurozone economy.
The pause follows seven consecutive interest rate cuts over the past year, which have brought the deposit rate to 2 percent — a level the ECB considers neither stimulative nor restrictive for the economy.
“The environment remains exceptionally uncertain, especially because of trade disputes,” the Bank said in a press release.
The move was widely expected due to strong signaling from policymakers that they would defer any further interest rate reductions until after the outcome of trade negotiations between Brussels and Washington was known.
The two sides are closing in on a deal for a 15-percent U.S. baseline tariff — though the EU stands ready to retaliate if U.S. President Donald Trump pushes back too strongly, according to EU diplomats briefed on the strategy.
ECB President Christine Lagarde said she hoped for a quick resolution to the negotiations. “The sooner it is resolved, the less uncertainty we have to deal with, and that would be welcomed by every economic actor, including ourselves,” she told a press conference.
The global uncertainty spurred by the erratic policymaking style of the U.S. administration has also sparked a move away from U.S. dollar assets into European ones, pushing the euro to multi-year highs.
Hawkish vibes
The ECB said that the eurozone economy has proven resilient despite all the challenges. “Growth is developing mostly in line with, if not a little better than, our expectations,” Lagarde said.
A survey of business managers on Thursday showed that economic growth picked up in July, though the overall expansion of the economy remains modest.
“The eurozone economy appears to be gradually regaining momentum,” Cyrus de la Rubia, chief economist at Hamburg Commercial Bank said in a statement accompanying the release. “The recession in the manufacturing sector is coming to an end, and growth in the services sector accelerated slightly in July.”
Financial markets expect the ECB to deliver one more interest rate cut before the end of the year on the back of policymakers’ warnings that a strong euro combined with higher import duties could cause inflation to fall well below the ECB’s 2 percent target.
However, outspoken hawk Isabel Schnabel recently said that the bar for another rate cut is “high”.
The ECB’s own forecast sees inflation dropping below target to 1.6 percent in 2026, but Lagarde downplayed its importance, saying that inflation will return to target in the medium term, which the Bank typically sees as two years ahead.
Analysts have taken Lagarde’s words as a sign that the ECB will be very cautious in its next policy steps. “Taking today’s meeting at face value, the bar for yet another rate cut this year has clearly been raised,” said ING economist Carsten Brzeski. Still, he warned against ruling out a further cut as inflation and other economic data “could rather disappoint over the summer.”
This story has been updated.
