Chairman of European Central Bank Christine Lagarde at the 2025 European Central Bank Forum on Central Bank held in Sintra, Portugal on June 30, 2025.
Horacio Villalobos | Corbis News | Getty Images
The European Central Bank on Thursday was stable amid great economic uncertainty as the European Union shouts to negotiate a trade deal with the US by the end of the month.
The ECB has cut interest rates at each of its four meetings so far this year, winning major deposit facilities from 3% in January to 2% in June. Last year, the rate was reduced from its record high of 4%.
“The environment remains extremely uncertain, especially due to trade disputes,” the ECB said in a statement, adding that the June inflation and growth outlook is supported by recent data.
Annual inflation in the Euro area reached a 2% target for the central bank last month, but traders widely anticipated holdings in July, largely due to geopolitical volatility. The US is the EU’s largest bilateral trade and investment partner, with a bloc of 27 people exporting 530 billion euros ($590 billion) of goods to the state last year.
As of Thursday, the future of that trade relations remains in the air, with one possibility being a baseline tariff rate of 15% for all EU imports into the US, along with retaliation measures on the part of the EU.
ECB officials have been suggesting for some time that their work in defeating inflation is nearly complete. This is looking for a so-called neutral level where rates are stimulating but not limited. ECB chief economist Philip Lane told CNBC earlier this month that “the final cycle is complete and we’ll beat inflation,” but policymakers will remain aware of changes in the medium-term outlook.
Growth risk is “leading from drawbacks”
In a press conference following the decision, ECB President Christine Lagarde said the eurozone economy performed better than expected in the first quarter. It was not only due to front-loading exports ahead of the expected tariff hike, but also due to the increased private consumption and investment, increased real revenue and ease of funding conditions, she said.
Emphasizing the current level of forecast uncertainty, Lagarde continues to say that the risks to growth are “leaning towards the negative side,” and escalation of trade tensions potentially reduced exports, investments and consumption, weighing business and household sentiment.
Conversely, she said, a rapid resolution of trade tensions, along with rising European defence and infrastructure spending, could drive growth more than previous forecasts in the coming months.
Investors want to assess whether central banks are concerned about the recent valuation of the euro.
Lagarde said Thursday that stronger euros could “have a chance of lowering inflation than expected,” and that higher global tariffs could simultaneously lower prices if countries with excessive capacity rerout exports to the euro region. Following the ECB decision, the euro was choppy, trading about 0.08% lower against the US dollar at 5:32pm in London at $1.176. This is still rising from the roughly $1.026 percentage earlier this year as investors moved significantly out of greenback due to political and financial uncertainty.
But Lagarde again emphasized that the ECB is monitoring an overturned scenario in which fragmented supply chains have constrained the domestic economy and pushed prices around the world. She said that increasing financial spending and extreme weather events also put an increased inflation at risk.
Euro/US Dollar exchange rate.
All options are open for ECB
An economist at RBC Capital Markets said Lagarde’s press conference highlighted a positive signal from the Euro area economy and appeared to underestimate concerns about weak inflation, leading them to change calls at the remaining 2% rate of the year.
Accountancy MHA economic adviser Joe Nellis said another interest rate cut might still come in 2025, but said the ECB will wait from August 1 to confirm that it can avoid 30% US tariffs on EU goods.
“If the US trade contract is not reached in advance, the ECB may again look at the reduction rate in September to counter the barriers to economic growth imposed by tariffs,” Neris said.
Mark Wall, European Economics President at Deutsche Bank, said the ECB keeps all the options on the table.
“If trade uncertainty declines, the combination of a resilient economy and a significant easing of fiscal easing ultimately leads to an upward risk to inflation. The market is not far from switching focus from the last cut to the first hike,” Wall said.
