Central Bank momentarily halts, yet market anticipates further loosening
The European Central Bank (ECB) has chosen to halt further interest rate cuts for now, maintaining the main refinancing rate at 2.15% and the deposit facility rate at 2.0%, following a series of reductions over the past year[1][4]. This decision comes amid persistent trade uncertainties and the recent stabilisation of inflation around the ECB’s 2% medium-term target[1][4].
Inflation, which reached the ECB’s target in June 2025, is forecasted to dip below this level later in the year, remaining subdued for approximately 18 months[1]. This is due to factors such as a stronger euro, declining energy prices, and cheaper imports, particularly from China[1].
Given these inflation dynamics and uncertain global trade conditions, ECB policymakers are adopting a wait-and-see approach, emphasising the importance of maintaining flexibility without committing firmly to further easing[1]. The consensus suggests a small chance of one final cut this year, likely in September, with about a 50% probability[1].
Following this potential final cut, markets anticipate a possible return to monetary tightening (rate increases) starting in late 2026, should economic conditions warrant it[1]. Fiscal spending and other macroeconomic factors have so far not prompted a deviation from this cautious stance, as the ECB aims to balance supporting growth without reigniting inflation pressures amid ongoing trade and geopolitical risks[1].
Richard Carter, head of fixed interest research at Quilter Cheviot, believes that this pause is more of a temporary halt rather than a full stop after a fairly aggressive rate-cutting cycle[1]. Carter also suggests that there could be pressure for a September cut if inflation stays in check[1].
Konstantin Veit, on the other hand, acknowledges the internal debate within the ECB about whether inflation might undershoot its target over the medium term[1]. Veit adds that the 2% policy rate is seen by many Governing Council members as the mid-point of a neutral range[1].
Roelof Salomons, chief investment strategist for the Netherlands at the BlackRock Investment Institute, suggests that tariffs could actually drag inflation lower in Europe, given the potential for currency appreciation[1]. Salomons also points out that global policy shifts have created unease in Europe, but also a sense of urgency and realization that the European growth model needs reform[1].
BlackRock recently upgraded its view on European equities to "neutral" this year, but hopes for further improvement hinge on reforms addressing deeper weaknesses in the eurozone growth model[1]. Despite the current pause, the economy in the eurozone has proven resilient overall, partly reflecting the ECB’s past interest rate cuts[1].
[1] - Source: Reuters, July 2025 [4] - Source: ECB press release, July 2025
Business and finance are significant factors in the ECB's decision-making process, as reflected in their pause on further interest rate cuts, a wait-and-see approach, and potential return to monetary tightening. These economic actions are directly influenced by factors such as ongoing trade uncertainties, inflation dynamics, and fiscal spending.
