Europe's central bank to hold off on another rate cut until it knows how
bad the tariff blow will be
[July 24, 2025] By
DAVID McHUGH
FRANKFURT, Germany (AP) — The European Central Bank will likely hold off
on making another interest rate cut Thursday, choosing to wait until it
can measure the size of any economic blow from higher U.S. tariffs.
The ECB has already cut rates eight times since June of last year and
President Christine Lagarde said after the last policy meeting June 5
that the central bank is “getting to the end of a monetary policy
cycle." 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 bench mark rate now at 2%, down from a record high of 4%,
analyst think there could be one more rate cut coming, but only in
September.
The reason, say analysts: The ECB's policymakers simply don't know the
outcome of talks between the EU's executive commission and the Trump
administration. 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 that the
actual rate may be lower than Trump's tariff threats. The talks are up
against an Aug. 1 deadline, but earlier deadlines have slipped as the
sides kept talking.
The decision to hold rates unchanged will be “uncontroversial” among
members of the bank's rate-setting council, said analysts at UniCredit's
Investment Institute.
“In light of recent events, the risk of an adverse tariff scenario has
increased since the June ECB meeting. The 30% tariff on EU goods
threatened by the US is much higher than generally expected,” the
UniCredit analysts wrote. "However, the response of financial markets to
US President Donald Trump’s letter to the EU has been muted, and this
seems to reflect expectations that the landing point for tariffs on EU
goods will be materially below 30%.
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The sun sets behind the European Central Bank, right, and the
buildings of the banking district in Frankfurt, Germany, Tuesday,
July 1, 2025. (AP Photo/Michael Probst, file)
 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.”
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 of
inflation by reducing demand for goods.
Growth in the eurozone was relatively strong at 0.6% in the first
quarter - though that was partly due 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, has attracted
attention as a potential damper on growth and ECB Vice President
Luis de Guindos said any rapid moves over $1.20 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.
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