Volkswacht Bodensee - ECB holds rates with US tariffs decision on horizon

The pause brought to an end a streak of consecutive cuts stretching back to September 2024 that has seen the ECB slash its benchmark deposit rate to two percent.

The swift reduction in borrowing costs for businesses and households in the 20 members of the single-currency bloc has come as inflation has fallen back from the double-digit peaks seen at the end of 2022.

Consumer prices in the eurozone rose at a pace of two percent in June, exactly in line with the ECB's target for inflation.

The sinking price pressures have opened the way for the ECB to lower interest rates, while concerns over the outlook for the eurozone have mounted.

In its rates announcement the ECB said that the economic environment remained "exceptionally uncertain, especially because of trade disputes".

Trump has set a deadline of August 1 to impose a basic tariff rate of 30 percent on goods from the EU, but negotiations to find a compromise deal have progressed.

A spokesman for the European Commission said earlier on Thursday a deal with the United States is "within reach", while diplomats said Wednesday the US had tabled a deal for a general 15-percent tariff.

While waiting for a resolution to the trade dispute -- or an unsuccessful end to talks -- the ECB would want "more clarity" before making their next move, UniCredit analysts said.

- Trade talks -

"Neither the economic data nor latest data regarding price dynamics demand an immediate response from the ECB," according to Dirk Schumacher, chief economist at German public lender KfW.

Eurozone inflation came in at exactly two percent in June and economic indicators including rising factory output have encouraged more optimism about the health of the economy.

The ECB would also want to "keep some powder dry for the case of emergency" if Trump were to apply harsh tariffs, Berenberg analyst Felix Schmidt said.

"A further escalation in the trade dispute would have a significant negative impact on the eurozone economy," leading to more rate cuts, Schmidt said.

The increased strength of the euro against the dollar as a result of tariff uncertainty could also encourage policymakers to further soften the ECB's monetary policy stance.

The euro has surged almost 14 percent against the dollar since the start of the year, boosted by investor moves to dump US assets in the face of Trump's impetuous policymaking and attacks on the US Federal Reserve.

-Strong euro-

A stronger euro would make imports cheaper and further suppress inflation. The ECB is already predicting the indicator to dip to 1.6 percent in 2026 before returning to target in 2027.

Investors will be listening closely to ECB President Christine Lagarde's comments in Frankfurt at 2:45 pm (1245 GMT) for indications of what could come next.

Lagarde dropped a strong hint that the ECB's cutting cycle was "getting to the end" at the last meeting in June, while stressing a data-dependent and meeting-by-meeting approach in the face of uncertainty.

After Thursday's pause, observers will turn their attention to how ECB thinking is developing ahead of its next gathering in September.

"A relatively quiet July meeting could feature some heightened scrutiny on how comfortable policymakers would be with another euro rally," according to ING bank analyst Carsten Brzeski.

Worries over currency fluctuations "may not make their way to official communication, but could help tilt the balance to a more dovish overall tone," Brzeski said.

C.Koch--VB