Uncertainty in trade wars causes pause in interest rate reductions within the eurozone.
The imposition of US tariffs on Eurozone goods has sparked concerns about the region's economic stability, particularly in relation to inflation and growth. While the tariffs have undoubtedly had an impact on trade and supply chains, their direct influence on inflation has been somewhat mitigated by other factors such as falling energy prices and easing domestic price pressures.
Raphael Brun-Aguerre, a senior economist at J.P. Morgan, has noted that while tariffs have affected euro area activity, the overall growth rate has been moderate, with a forecast of 0.5% annualized in the third quarter and 0.75% in the fourth quarter of 2025. This suggests that while tariffs are impacting economic activity, they are not solely responsible for inflationary trends in the Eurozone.
The European Central Bank (ECB) has been cautious in its monetary policy stance, considering the uncertain environment due to trade disputes, including US tariffs. The ECB recently held its key interest rate steady at 2%, marking a pause in the rate-cutting cycle that began in June 2024. This decision reflects a balance between supporting economic growth and controlling inflation, which is now seen as less of a concern as the inflationary phase is considered over.
Markets expect one more interest rate cut this year, given the ongoing economic uncertainties and potential for further economic slowdown due to trade tensions. However, the ECB's approach remains data-dependent, and future decisions will be assessed meeting by meeting, with new projections expected in September.
The ECB's baseline projection from June, which incorporates 10% US tariffs, sees price growth below 2% over the next 18 months. In response to the economic challenges posed by the US tariffs, the ECB has acted eight times in the past 12 months to lower borrowing costs for the 20 European Union member states using the euro.
If a truce is not secured by 1 August, a higher 30% rate will kick in. EU diplomats have expressed optimism that a deal to avert the worst effects of this threatened 30% baseline rate on EU goods shipped to America is close. However, retaliation from the EU could fan the flames of inflation in the euro area.
The countermeasures could extend to targeting imports of US goods and services. The European Commission is preparing several packages of measures, worth a combined €93bn (£81bn), to be deployed in the event of a truce failing to be agreed. The cost of many US products could be passed on down supply chains to consumers if retaliation occurs.
The ECB will decide policy "meeting by meeting... based on its assessment of the inflation outlook and the risks surrounding it". The Bank of England, meanwhile, has held its rate but is considering cuts ahead despite global risks. Financial markets and economists are currently split on the prospects for further rate reductions. The cost of living crisis, according to economists, is over.
In conclusion, while US tariffs pose challenges to the Eurozone economy, the ECB's cautious stance on interest rates reflects both the need to address economic uncertainties and the current inflation outlook. The ECB's estimates show that higher US tariffs would result in lower growth and inflation in the euro zone over the medium term. The ECB's first tranche of measures is slated to take effect on 7 August.
The escalation of US tariffs on Eurozone goods could potentially lead to financial strains in the business sector, as the European Central Bank (ECB) is preparing countermeasures worth €93bn to mitigate the impact of the threatened higher tariffs. However, if a truce is not secured by 1 August, the increased tariff rate of 30% could fan the flames of inflation in the euro area, causing ripples throughout the supply chains and ultimately affecting consumers.
