The European Central Bank has decided to keep interest rates unchanged, following data indicating that the eurozone economy continues to grow steadily while inflation remains low.
This decision aligns with expectations that the ECB would hold rates temporarily before potential reductions later in the year. The bank chose not to lower borrowing costs, maintaining its main rate at 2% and the deposit rate at 2.15%.
Christine Lagarde, the ECB’s president, stated that the eurozone is in “a favorable position” and that the challenges related to rising living costs have largely subsided. She emphasized the importance of focusing on future developments.
Over the past nine months, the ECB has reduced interest rates eight times, dropping from a peak of 4%. The bank is closely monitoring how the EU might be impacted by increased tariffs on goods exported to the US, which could be part of an upcoming trade agreement between Washington and Brussels.
Earlier this month, Donald Trump proposed a 30% tariff on goods imported from the EU as part of his aggressive global trade strategy. Financial markets are optimistic about reaching a resolution before the August 1 deadline, especially after the US reached a deal with Japan to limit tariff hikes earlier this week.
ECB officials are also cautious about the possibility of an economic slowdown coinciding with falling prices, particularly if China and other Asian countries affected by US tariffs flood European markets with inexpensive goods.
An increase in the euro’s value against other currencies is expected to lower import costs for the eurozone, potentially easing inflationary pressures.
Lagarde noted that economic risks remain “leaning toward negative outcomes,” with key threats to growth including escalating conflicts in the Middle East and Ukraine, as well as global trade tensions that could “reduce exports and hinder investment and consumption.”
Despite these concerns, she emphasized that the ECB is “well-prepared to observe developments” since inflation has reached 2%, and projections indicate it will stabilize at this level in the medium term.
She added, “Wage growth is slowing, and economic expansion has been relatively positive. This suggests we are confident that the inflationary pressures of recent years are behind us, and our focus is now on anticipating future developments.”
Mathieu Savary, chief strategist at BCA Research, suggested that the July decision might be a temporary pause before significant rate cuts in upcoming meetings to avoid economic stagnation and prevent deflation in the eurozone.
He stated, “The ECB remained steady today, but this pause is just the beginning. Disinflation is already widespread across the eurozone. With a stronger euro, potential US tariffs, and growing competition from China, the region faces a new challenge: deflation.
“The governing council may soon find itself needing to cut rates more aggressively than currently anticipated by the markets.”
In its report, the ECB noted, “The economy has shown resilience overall in a difficult global environment. At the same time, the situation remains highly uncertain, particularly due to ongoing trade disputes.”
Financial markets anticipate that the central bank will maintain rates at its next meeting in September before resuming cuts in December.
The July decision followed private sector surveys across the 20-member currency bloc, which revealed a slight increase in output despite prolonged stagnation in France and Germany, the two largest economies in the eurozone.
Most eurozone countries currently have historically low unemployment and low inflation, providing a solid foundation for future growth.
However, the potential for increased tariffs from Washington, including a possible 50% levy on steel exports to the US, has led many companies to delay investment and hiring decisions.
— news from The Guardian
— News Original —
European Central Bank keeps interest rates on hold despite sluggish growth
The European Central Bank has kept interest rates on hold as figures showed the eurozone economy maintaining a steady pace of economic growth amid low inflation.
In what was widely expected to be a pause before further cuts later in the year, the Frankfurt-based central bank shunned calls to reduce the cost of borrowing and held its main interest rate at 2% and the deposit rate at 2.15%.
The ECB’s president, Christine Lagarde, said the eurozone was in “a good place” and that the cost of living crisis was in the past. “Our job is now to look at what is coming,” she added.
The ECB, which has cut interest rates eight times in the last nine months from a high of 4%, is watching to see how the EU is affected by higher tariffs on goods exported to the US, which are expected to be part of a trade deal between Washington and Brussels.
This month, Donald Trump threatened a 30% tariff on goods imported from the EU as part of his high-stakes global trade war. Financial markets are hopeful of a deal before the deadline of 1 August after the US reached an agreement to limit tariff increases with Japan on Tuesday.
Central Bank officials are also concerned that an economic slowdown could be married to a drop in prices should China and other east and south-east Asian countries, also hit by US tariffs, dump cheap goods in European markets.
A rise in the value of the euro against a basket of other currencies is likely to make imports to the eurozone cheaper, which could also bring down inflationary pressures.
Lagarde said the risks to the economy remained “tilted to the downside” and that among the main threats to growth were a worsening of the conflicts in the Middle East and Ukraine and global trade tensions that could “dampen exports and drag down investment and consumption”.
However, she said the ECB was “well-positioned to wait and see” because inflation was at 2% and that the central bank’s projections pointed to the rate stabilising at that level in the medium term.
Lagarde added: “Wage increases are coming down and growth has been developing in a relatively favourable way. It means we are now confident that the inflation shock of the past few years is behind us and our job is to look at what is coming.”
Mathieu Savary, the chief strategist at BCA Research, said July’s decision could be a pause before steep cuts in rates at future meetings to prevent the eurozone economy from stalling and head off a period of deflation.
He said: “The ECB stood pat today, but this pause is not the end of the story. Disinflation is already deeply entrenched across the eurozone. Now, with a stronger euro, looming US tariffs, and intensifying Chinese competition, the region faces a new threat: deflation.
“The [ECB] governing council may soon find itself forced to cut rates more aggressively than markets currently anticipate.”
In its report, the ECB said: “The economy has so far proven resilient overall in a challenging global environment. At the same time, the environment remains exceptionally uncertain, especially because of trade disputes.”
Financial markets expect the the central bank to hold rates at its next meeting in September before cuts resume again in December.
The July decision came after surveys of the private sector across the 20-member currency bloc showed a modest rise in output despite a long period of stagnation in its two largest economies of France and Germany.
Most countries in the eurozone have historically low levels of unemployment and low inflation, giving them a strong platform for growth.
However, the threat of increased tariff from Washington, and a possible 50% levy on exports of steel to the US, has caused many firms to hold back investment and new hiring.