ECB expected to hold rates as Trump tariff uncertainty lingers

New Straits Times

3 days ago

FRANKFURT: The European Central Bank (ECB) is set to hold interest rates for the first time in almost a year when policymakers meet this week, despite concerns over the potential impact of higher US tariffs on the eurozone economy.
The 26 members of the ECB's governing council will convene just over a week before an Aug 1 deadline set by US President Donald Trump for the imposition of punitive tariffs by his administration.
Trump has threatened to triple a basic tariff on imports from the European Union to 30 per cent if Brussels does not reach a deal by the end of the month, casting uncertainty over the future of transatlantic trade.
But the ECB is expected to hold tight on rates instead of preempting the outcome of negotiations, pausing a series of cuts that began in September.
The central bank has reduced its benchmark rate a total of eight times since June last year and at each of its last seven meetings, bringing it down to 2.00 per cent.
The rapid reduction in rates came as eurozone inflation fell back towards the ECB's two per cent target from the double-digit highs seen in 2022.
In June, eurozone inflation sat exactly on the ECB's target and was forecast by central bank officials to remain at two per cent for the year.
The ECB would "almost certainly leave interest rates unchanged" at the conclusion of its monetary policy meeting on Thursday, analysts from Italian bank UniCredit said in a note.
"The central bank will now want to have more clarity on the trade outlook before it considers adjusting its policy further," they said.
Despite the murky outlook, the ECB was in a "good place" to deal with what comes next, executive board member Isabel Schnabel told financial news service Econostream Media this month.
And with the euro area economy showing some signs of life despite Trump's threats on tariffs, "the bar for another rate cut is very high", she said.
Euro area factory output has grown for four consecutive months, and the bloc's manufacturing PMI – a survey-based measure of manufacturers' overall health – rose in June to its highest level since August 2022.
The improving picture painted by recent indicators could, however, be shattered if Trump were to follow through with additional tariffs on top of steep existing levies on auto manufacturers, steel and aluminium.
The sabre-rattling from the Oval Office over trade – and Trump's repeated attacks on the US Federal Reserve's independence – have otherwise weakened the US dollar against the euro.
Were the euro to rise much further, it would make matters "much more complicated", ECB Vice-President Luis de Guindos told Bloomberg TV this month.
A stronger single currency brings with it the risk of undershooting the ECB's inflation target by making imports cheaper and cooling the economy, while making European exports more expensive.
Already, the ECB's forecasts published last month predict inflation to fall to 1.60 per cent in 2026, before recovering to two per cent the following year.
A strong euro means rate cuts later in the year are a matter of "when and by how much, and not if", ING bank analyst Carsten Brzeski said.
The question would receive "more attention" at forthcoming ECB gatherings, Brzeski added, but the uncertainty over US tariffs argued in favour of a "wait-and-see approach".
Trump had raised the threatened level of tariffs on EU exports to the United States since the ECB's last meeting, but where they would land after Aug 1 remains uncertain.
With the EU locked in talks with Washington to avoid higher tariffs, the necessary "clarity is unlikely to emerge by next Thursday", UniCredit analysts said.
A pause is likely before another cut later in the year, possibly as soon as September – the first meeting after the summer, they said.