The European Central Bank (ECB) is expected to hold interest rates steady for the first time in almost a year when policymakers meet later this week. The decision comes amid growing concerns over the potential impact of higher U.S. tariffs on the eurozone economy.
The ECB’s governing council, consisting of 26 members, will meet just days before an August 1 deadline set by U.S. President Donald Trump for the introduction of punitive tariffs. Trump has warned he will triple a basic tariff on imports from the European Union (EU) to 30 percent if Brussels does not reach a deal by the end of the month. This escalating trade dispute has created significant uncertainty for transatlantic commerce.
Despite these concerns, the ECB is expected to take a cautious approach and refrain from further rate adjustments. This marks a pause in the central bank’s series of interest rate cuts that began in September of last year. Since June 2024, the ECB has lowered its benchmark rate eight times, bringing it down to 2 percent.
These rate reductions have helped eurozone inflation ease closer to the ECB’s target. After soaring to double-digit highs in 2022, inflation fell steadily and, in June, reached the central bank’s 2 percent goal. Forecasts indicate inflation is likely to stabilize at this level for the rest of the year.
Analysts at UniCredit believe the ECB will likely leave rates unchanged at the conclusion of Thursday’s meeting. “The central bank will now want to have more clarity on the trade outlook before it considers adjusting its policy further,” they said in a note.
Executive board member Isabel Schnabel echoed this sentiment in an interview with Econostream Media, saying the ECB is currently in a “good place” to handle future challenges. With the eurozone economy showing signs of resilience, the bar for another rate cut remains high, she added.
Recent economic indicators paint a cautiously optimistic picture. Euro area factory output has grown for four consecutive months, and the bloc’s manufacturing PMI, a key measure of manufacturing health, rose in June to its highest level since August 2022. However, analysts warn this progress could be undermined if Trump enacts the additional tariffs.
The trade tensions and President Trump’s repeated criticism of the U.S. Federal Reserve have contributed to a weakening dollar and a stronger euro. While this benefits European importers by making goods cheaper, it also risks pulling inflation below target levels and hurting exporters by making their products more expensive abroad.
ECB Vice President Luis de Guindos told Bloomberg TV that a stronger euro “makes matters much more complicated” for the central bank. The ECB’s forecasts, published last month, predict inflation could drop to 1.6 percent in 2026 before returning to 2 percent the following year.
ING economist Carsten Brzeski noted that rate cuts later in the year are likely, saying it is “a matter of when and by how much, not if.” However, given the uncertainty over U.S. tariffs, a wait-and-see approach is expected at Thursday’s meeting.
Trump’s latest tariff threats have intensified since the ECB’s last meeting. With Brussels and Washington still locked in negotiations, analysts expect the necessary “clarity is unlikely to emerge by next Thursday,” according to UniCredit. As a result, many predict the ECB will pause now but may consider another rate cut later in the year, potentially as early as its September meeting following the summer break.
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