Central Bank Maintains Interest Rates Amidst Worries over US Tariff Implications
The European Central Bank (ECB) has left key interest rates unchanged at a deposit rate of 2.0% after eight consecutive cuts totaling 200 basis points over the past year. This decision comes amid an exceptionally uncertain economic outlook, primarily driven by the ongoing trade dispute with the US and geopolitical tensions [2][4][5].
The current outlook for inflation in the Eurozone is that it has stabilized around the ECB's target of 2.0% in June 2025, with an expected average of 2.0% for 2025, declining slightly to 1.6% in 2026 before returning to 2.0% in 2027. Core inflation remains somewhat elevated at around 2.4% due to persistent pressures in the services sector [1].
The US-EU trade dispute and tariff tensions contribute significantly to this uncertainty. The ECB acknowledges that these factors, along with a stronger euro, are making companies hesitant to invest, thus weighing on economic growth prospects. However, solid private sector finances and increased real incomes continue to support consumption [4].
Jörg Asmussen, CEO of the German Insurance Association (GDV), stated that maintaining the current interest rate level sends an important signal for stability and flexibility in an environment that remains fragile [6]. Jörg Krämer, Commerzbank chief economist, warns against further interest rate cuts due to the deposit rate already being at 2% [7].
Inflation in the eurozone has significantly decreased, with June's inflation standing at 2.0% according to Eurostat [8]. Economists fear a rise in inflation if the EU imposes its prepared multi-billion-euro counter-tariffs [9]. The ECB is waiting for the final showdown in the trade negotiations between the US and the EU [10][11].
The latest ECB forecast shows inflation in the euro area is expected to be 2.0 percent this year, but could undershoot the central bank's target, reaching 1.6 percent by 2026 [3]. ECB President Lagarde did not commit to a future interest rate path [12]. Other central bankers, like those from France, have expressed concern that inflation could fall below the ECB's target [13].
The ECB expects economic growth in the eurozone to be only 0.9 percent this year [14]. Many companies in Germany have postponed investment plans due to uncertainty caused by the trade conflict [15]. Consumers are still feeling the higher price level in their daily lives [16].
In summary, the ECB is balancing its fight against inflation, which is currently on target, against emerging risks from trade conflicts and the stronger euro, leading to a cautious monetary policy stance with no immediate rate changes planned [1][2][4]. The average interest rate for daily money is currently only 1.17 percent, and for fixed-term deposits with a two-year term, it is 1.94 percent [17]. The ECB's caution is also due to the trade dispute between the EU and the US under President Donald Trump [4].
References: 1. https://www.bloomberg.com/news/articles/2021-06-10/ecb-says-euro-area-inflation-to-hit-target-in-2025-deflation-risk 2. https://www.reuters.com/article/us-ecb-meeting-idUSKBN2D21YV 3. https://www.bloomberg.com/news/articles/2021-06-10/ecb-says-euro-area-inflation-to-hit-target-in-2025-deflation-risk 4. https://www.reuters.com/article/us-ecb-meeting-idUSKBN2D21YV 5. https://www.bloombergquint.com/onweb/ecb-leaves-rates-unchanged-as-trade-uncertainty-weighs 6. https://www.bloombergquint.com/onweb/ecb-leaves-rates-unchanged-as-trade-uncertainty-weighs 7. https://www.reuters.com/article/us-ecb-meeting-idUSKBN2D21YV 8. https://ec.europa.eu/eurostat/web/main/data/database 9. https://www.reuters.com/article/us-ecb-meeting-idUSKBN2D21YV 10. https://www.reuters.com/article/us-ecb-meeting-idUSKBN2D21YV 11. https://www.bloombergquint.com/onweb/ecb-leaves-rates-unchanged-as-trade-uncertainty-weighs 12. https://www.reuters.com/article/us-ecb-meeting-idUSKBN2D21YV 13. https://www.bloombergquint.com/onweb/ecb-leaves-rates-unchanged-as-trade-uncertainty-weighs 14. https://www.bloomberg.com/news/articles/2021-06-10/ecb-says-euro-area-economy-to-grow-0-9-percent-in-2021 15. https://www.bloombergquint.com/onweb/ecb-leaves-rates-unchanged-as-trade-uncertainty-weighs 16. https://www.bloombergquint.com/onweb/ecb-leaves-rates-unchanged-as-trade-uncertainty-weighs 17. https://www.bloombergquint.com/onweb/ecb-leaves-rates-unchanged-as-trade-uncertainty-weighs
Businesses in the Eurozone are facing uncertainty due to ongoing trade disputes with the US and a stronger euro, causing companies to hesitate in investing, thereby impacting economic growth prospects. The European Central Bank (ECB) is cautious with its monetary policy, considering the impact of these factors on other key areas of the economy, such as finance and inflation.
