With the European economy weathering Trump’s tariff onslaught better than expected, the bloc’s inflation has remained under control, prompting the European Central Bank (ECB) to keep its interest rate unchanged at 2 per cent on Thursday.
The unanimous decision, said the bank’s president, Christine Lagarde, was the result of taking into account the possibility of higher tariffs being imposed by the US administration.
"I never want to overstretch the general agreement in the room, but we had a unanimous decision by the Governing Council today to leave all three interest rates unchanged," she said, and added, “A stronger euro could bring inflation down further than expected. Moreover, inflation could turn out to be lower if higher tariffs lead to lower demand for euro area exports and induce countries with overcapacity to further increase their exposure to the euro area."
The ECB is standing pat on interest rates even as the US Federal Reserve has held the door open for a possible cut at its September 17 meeting.
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The 20 countries that use the euro currency – and where the ECB sets rate policy – showed 0.1 per cent growth in the second quarter over the quarter before. The S&P Global survey of purchasing managers, a key indicator of economic activity, came in at 51.1 in August, with readings over 50 indicating expansion.
The ECB raised rates sharply to combat a burst of inflation in 2021-23, and has since lowered them as inflation came back under control and concerns grew about growth. Higher rates fight inflation but can slow growth, while lower rates can stimulate economic activity by making borrowing cheaper for purchases.
"The disinflationary process is over," Lagarde said. The ECB chief also said they planned to follow a “data dependent meeting-by-meeting approach to determining the appropriate monetary policy stance”.
"We continue to be in a good place,” she said.
Eurozone inflation was 2.1 per cent in August, roughly in line with the bank's target of 2 per cent. Analysts think another cut is possible in the coming months.
Lagarde said risks to the economy have become more balanced, although “renewed worsening of trade relations could further dampen exports and drag down investment and consumption”.
"An improvement in business confidence could stimulate private investment. Sentiment could also be lifted and activities spurred if geopolitical tensions diminished, or if the remaining trade disputes were resolved faster than expected,” she added.
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