ECB leaves interest rates unchanged as it assesses impact of Trump tariffs

Irish Examiner

a day ago

The European Central Bank has left interest rates unchanged as it waits to see how big a blow US President Donald Trump's tariffs will inflict on the economy before deciding whether to cut rates again.
The bank's governing council announced on Thursday at its headquarters in Frankfurt that it would leave its benchmark deposit rate at 2%.
'The economy has so far proven resilient overall in a challenging global environment,' said bank president Christine Lagarde at her post-decision news conference.
'At the same time, the environment remains exceptionally uncertain, especially because of trade disputes.'
The ECB has already cut rates eight times since June of last year and Ms Lagarde said after the last policy meeting on June 5 that the central bank is 'getting to the end of a monetary policy cycle'.
US President Donald Trump sent the EU a letter informing officials of a potential 30% tariff (Julia Demaree Nikhinson/AP)
The monetary authority for the 20 countries that use the euro currency has been lowering rates to support growth after raising them in 2022-2023 to snuff out inflation caused by Russia's invasion of Ukraine and the rebound after the pandemic.
With the benchmark rate now at 2%, down from a record high of 4%, analysts think there could be one more rate cut coming, but only in September.
The reason, say analysts: The ECB's policymakers simply do not know the outcome of talks between the EU's executive commission and the Trump administration.
Mr Trump first set a 20% tariff for EU goods, then threatened 50% after expressing displeasure at the pace of talks, then sent the EU a letter informing officials of a potential 30% tariff.
EU officials earlier held out hope of winning at least the 10% baseline that applies to almost all trade partners, and analysts think the actual rate may be lower than Mr Trump's tariff threats. The talks are up against an August 1 deadline, but earlier deadlines have slipped as the sides kept talking.
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.
Higher tariffs, or import taxes, on European goods would mean sellers would have to either increase prices for US consumers – risking loss of market share – or swallow the added cost in terms of lower profits.
In either case, higher tariffs would hurt export earnings for European firms and slow the economy, which would strengthen the case for another rate cut in September.
The ECB's rate cuts have helped support economic activity by lowering the cost of credit for consumers and businesses to purchase goods. Higher rates have the opposite effect and are used to cool off inflation by reducing demand for goods.
Growth in the eurozone was relatively strong at 0.6% in the first quarter – though that was partly thanks to rushed shipments of goods trying to beat the tariffs.
Inflation has fallen from double digits in late 2022 to 2% 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% this year at 1.17 dollars, has attracted attention as a potential damper on growth and ECB vice president Luis de Guindos said any rapid moves over 1.20 dollars 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.