The European Central Bank (ECB) said on Thursday it will not be making any interest rate cut until it can measure the size of any economic blow from higher US tariffs as the US and European Union remain engaged in negotiations to finalise a trade deal before the August 1 deadline.
The ECB has so far cut interest rates eight times since last June, with the bank’s President, Christine Lagarde, saying that the central bank is “getting to the end of a monetary policy cycle”. The bank’s last policy meeting was held on June 5.
The bank has been lowering interest rates for the 20-country bloc that uses the euro currency to support growth after they were last raised in 2022-23 to counter inflation that was a direct result of Russia’s invasion of Ukraine in 2022, as well an aftermath of the pandemic.
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With the benchmark rate now being at 2 per cent, down from a record high of 4 per cent, analysts believe there is a possibility of one more rate cut since ECB’s policymakers don’t yet know of the outcome of talks between the EU’s executive commission and the Trump administration.
However, they don’t think it could be coming in before September.
Trump had first set 20 per cent tariff for EU goods, then threatened 50 per cent when he felt disappointed with the pace of talks. He sent the EU another letter recently in which he informed officials of a potential 30 per cent tariff imposition.
While EU officials were previously hopeful of winning at least the 10 per cent baseline tariffs that apply to all trade partners, analysts now think that the actual rate may be lower than Trump's tariff threats.
“In light of recent events, the risk of an adverse tariff scenario has increased since the June ECB meeting. The 30 per cent tariff on EU goods threatened by the US is much higher than generally expected,” wrote UniCredit analysts.
"However, the response of financial markets to US President Donald Trump's letter to the EU has been muted, and this seems to reflect expectations that the landing point for tariffs on EU goods will be materially below 30 per cent,” it further said.
With signs of economic activity holding up reasonably well, “the ECB can afford to wait and see what the outcome of trade negotiations will be.”
Growth in the eurozone was relatively strong at 0.6 per cent in the first quarter – though that was partly due to rushed shipments of goods trying to beat the tariffs. Inflation has fallen from double digits in late 2022 to 2 per cent in June, in line with the ECB's target. A stronger euro, which lowers the price of imports, and softer global prices for oil have helped keep inflation moderate.
The stronger euro, up 13 per cent this year at USD 1.17, has attracted attention as a potential damper on growth and ECB Vice President Luis de Guindos said any rapid moves over USD 1.20 could be “much more complicated.” But the ECB typically does not target the exchange rate, and the euro's rise is considered to be less the result of Europe's strength and more the result of a weaker dollar weighed down by investor uncertainty about the future path of inflation, growth and government debt in the US.
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