The European Central Bank stabilized interest rates on Thursday as economic uncertainty continued in the wake of US Donald Trump’s aggressive tariff agenda.
Prior to the decision, the market had a price of about 99% of the time, with a 2% chance of ECB’s major deposit facility fees remaining. The central bank was last cut in June, falling further from last year’s record 4%.
“Inflation is currently a mid-term 2% target, and the Governance Council’s assessment of inflation outlook has remained largely unchanged,” the ECB said in a statement.
The central bank has added that it has not prior committed to specific interest rate passes following a meeting-by-meeting data-dependent approach. The ECB showed little indication of future directions for the rate.
Prolonged economic uncertainty
The ECB is tackling global economic uncertainty despite eurozone inflation hovering central banks’ 2% target in recent months and attacking trade deals with the US.
The Transatlantic Partner agreed to a 15% blanket tariff on EU exports to the EU in July, and detailed details of the framework that will be manifested last month in more detail. We addressed several questions about major European sectors such as medicines.
However, questions remain as some issues remain open, such as wine and spirit sector regulations. Additionally, tariff concerns have increased following Trump’s threat of retaliation after the EU hit. alphabetGoogle with $3.45 billion antitrust fine.
Fear of influence that could remain in economic growth. Eurozone growth has slowed even as rates decline, with the latest figures showing growth of just 0.1% in the second quarter after an expansion of 0.6% in the previous period.
Lagarde said on Thursday that “the risks of economic growth are more balanced.”
“Recent trade agreements have reduced uncertainty, but new deterioration in trade relations could further weaken exports and reduce investment and consumption,” she said. Lagarde also said, “As a result of the still unstable trade policy environment, the outlook for inflation remains more uncertain than usual.”
In response to a question from CNBC’s Annette Weisbach, Lagarde added that trade uncertainty has been “clearly reduced” as risks like European retaliation against US policy have been reduced. However, Lagarde said the uncertainty has not returned to “normal” pre-Covid levels, adding that “probably not at normal levels.”
Would you like to cut more?
Economists and analysts appeared to be split over whether more interest rate cuts would look ahead and expect them.
“We’re looking forward to seeing you in the future,” said Thomas Pow, chief economist at consulting firm RSM.
However, he said, “Like 15% tariffs on the EU and growing uncertainty, there is weight at the time, and the door could be cut further at the end of the year.”
“The combination of hits on investment and exports, along with a stronger euro along with cheaper imports from China, could weaken growth and inflation enough to guarantee another rate cut later this year,” Pugh explained in a memo.
Elsewhere, Schroeders’ Eurozone Economist Eileen Lauro said Thursday’s announcement “confirms the view that the mitigation cycle has ended.”
Lauro believes trade uncertainty has declined and the eurozone’s economic recovery is accelerating as businesses become less cautious and labor markets continue to become more severe.
“The risks in the eurozone have shifted from trade uncertainty to political instability. France is currently in the financial spotlight. But the economic resilience and strengthening domestic demand means that the ECB can afford to prevent changes to monetary policy,” she said.
Updated expectation
With the interest rate decision itself widely expected, Thursday’s attention focused on Lagarde’s press conference and the latest forecasts for inflation and economic growth. The central bank last updated its economic forecast in June.
“The new ECB staff forecast presents a similar inflation picture to the one predicted in June. They will see headline inflation average of 2.1% in 2025, 1.7% in 2026 and 1.9% in 2027,” the central bank said.
In June, headline inflation was projected to average 2% this year, 1.6% next year, and 2% in 2027.
The so-called core inflation, which removes food and energy costs, averages 2.4% this year, and is expected to remain the same from previous estimates.
Looking at economic growth, the ECB said, “The economy is projected to increase by 1.2% in 2025, revised from the 0.9% forecast for June.”
The 2026 forecast grew by 1% with slight trimming.
