Central Bank maintains interest rates, attributes persisting trade disputes as cause for immobility
The European Central Bank (ECB) has decided to keep interest rates steady at 2%, marking a pause in the seven consecutive rate cuts that preceded this decision [1]. This move was widely anticipated by analysts [2].
The ECB's decision was likely influenced by the ongoing trade tensions between the U.S. and the EU. Reports suggest that the two economic powerhouses are closing in on a deal, with a 15% tariff on both sides, similar to the one agreed upon with Japan [3]. However, the ECB remains concerned about the uncertainty caused by trade disputes, particularly pending U.S. tariffs [4].
The formation of this trade deal is expected to reduce trade-related uncertainty and economic volatility in the Eurozone. This stability could ease pressure on the ECB to maintain highly accommodative monetary policy and potentially reduce inflationary pressures stemming from tariff-induced cost increases [1].
Despite the pause, the benchmark deposit rate, which affects banks and individual savers, remains at 2% [2]. The ECB's target for inflation is symmetrical, and it does not aim for falling prices as this could lead to delayed investments and purchases [5]. Inflation in the 20-nation eurozone stood at the central bank's 2% target in June [6]. According to recent ECB predictions, eurozone inflation is expected to come in on target for the year as a whole [7].
The economy has so far proven resilient overall in a challenging global environment. Domestic price pressures have continued to ease, with wages growing more slowly [8]. However, the 15% tariff still represents additional costs for EU exporters to the U.S., which might dampen export growth somewhat compared to a zero tariff scenario [1]. The ECB will likely continue to monitor trade developments, as any escalation or prolonged tariffs could weigh negatively on Eurozone economic activity and inflation, potentially prompting a more dovish monetary stance.
The EU has stated that it is prepared to retaliate with tariffs on U.S. goods if necessary [9]. The current status of the trade disputes between the United States and the European Union is that they have reached a preliminary trade agreement as of July 27, 2025. This deal establishes a 15 percent baseline tariff on most EU goods entering the U.S., which is a compromise from the previously threatened 30 percent tariff [1][3][4].
In summary, the deal mitigates a trade war risk, fostering greater economic stability, which is generally positive for ECB policy. However, the presence of a 15% tariff means some residual trade friction remains, so the ECB’s policy outlook will incorporate ongoing assessment of trade impacts on growth and inflation in the Eurozone [1][3][4].
References:
- The New York Times
- Bloomberg
- Reuters
- Financial Times
- ECB
- Eurostat
- ECB
- Eurostat
- European Commission
- The 15% tariff in the proposed trade deal may affect the Eurozone's businesses and exports, potentially leading to a decrease in export growth compared to a zero tariff scenario.
- Despite the presence of the tariff, the European Central Bank (ECB) may view the compromise as beneficial, fostering greater economic stability that could stabilize its monetary policy outlook.
- The ongoing trade disputes between the U.S. and the EU have implications for the Eurozone's politics, economy, and environment, with potential impacts on growth and inflation, as well as trade relationships and the business sector.
