The European Central Bank (ECB) is likely to pause its cycle of lowering key interest rates, keeping them at current levels at its meeting on Thursday.
Currently, the deposit rate stands at 2%, the main refinancing operations (MRO) rate at 2.15% and the marginal lending rate at 2.4%.
Over the past year, the regulator has cut rates eight times by 25 basis points. In June, ECB President Christine Lagarde said that it was close to completing its cycle of monetary policy easing. Most members of the ECB’s governing council believe that a deposit rate of around 2% is consistent with a neutral monetary policy stance.
Impact of the tariff war
Inflation in the eurozone stood at 2% year-on-year in June, having fallen below this level a month earlier.
In such conditions, the ECB has the opportunity to wait for more definite information on future US trade tariffs before deciding whether to continue adjusting its policy, experts say.
Earlier, US President Donald Trump announced his intention to impose a 30% tariff on European goods imported into the country from August 1 if Brussels fails to conclude a trade agreement with Washington by that date.
ECB position
The introduction of large import tariffs in the US is likely to weaken both economic growth and inflation in the eurozone. It makes no sense for the ECB to adjust its current position until it is clear what the tariffs will be.
“We expect the regulator to wait for developments before responding and to factor all news into its September forecasts,” HSBC analysts said in a review.
Experts do not expect the ECB to make clear forecasts on the future path of interest rates at its upcoming meeting.
“With so much uncertainty ahead of the introduction of mutual tariffs by the US and the EU, it simply does not make sense to make clear statements about future policy, as they may become irrelevant in a matter of weeks or even days,” RBC Capital Markets economists note.
Experts also point to the strengthening of the euro against the US dollar as an additional source of uncertainty for the ECB. Since the beginning of this year, the euro has risen by 13% against the US currency.
The strengthening of the euro is holding back inflation in the eurozone by making imports cheaper. However, a strong currency will also exacerbate the negative impact of higher tariffs on demand for European goods in the US, which will contribute to weaker economic growth in the region.
“While the potential impact may be limited for now, as global sentiment appears to be shifting towards a weaker dollar and a stronger euro, concerns are likely to grow,” Investec economist Ryan Djajasaputr said.
