ECB Pauses Rate Cuts Amid Trump Tariff Threats \ Newslooks \ Washington DC \ Mary Sidiqi \ Evening Edition \ The European Central Bank is expected to hold interest rates steady, citing uncertainty over U.S.-EU trade talks amid tariff threats from President Trump. With the benchmark rate at 2% after eight cuts, further action may be delayed until September. Stronger eurozone growth and falling inflation give the ECB room to pause.
Quick Looks
- ECB expected to keep rates unchanged on Thursday.
- Eight rate cuts since June 2024 have lowered rates to 2%.
- Decision influenced by Trump’s escalating EU tariff threats.
- Trade talks between EU Commission and U.S. remain unresolved.
- Trump’s threats range from 20% to 50% tariffs.
- ECB may delay next rate cut until September.
- Eurozone Q1 growth at 0.6%, inflation down to 2%.
- Strong euro and softer oil prices support inflation control.
- Markets remain calm despite Trump’s tariff warning letter.
- ECB Vice President warns rapid euro gains could hurt growth.
Deep Look
The European Central Bank is expected to hit pause on its aggressive interest rate-cutting campaign during its Thursday policy meeting, choosing instead to await clarity on trade negotiations between the European Union and the United States. The anticipated decision to hold rates steady comes after eight consecutive cuts since June of last year, bringing the ECB’s benchmark rate down from a record 4% to its current level of 2%.
The move reflects mounting uncertainty over the potential economic fallout of escalating tariff threats from President Donald Trump, who in recent weeks has floated duties ranging from 20% to 50% on EU goods. While EU officials initially hoped to secure baseline treatment under the U.S. trade regime—meaning no more than the 10% tariffs applied to most partners—those hopes have dimmed. A letter from the Trump administration informed the EU of a potential 30% tariff, raising alarm in Brussels and beyond.
Despite the sharp rhetoric, analysts believe the ECB’s decision to keep rates unchanged will be a consensus call. “In light of recent events, the risk of an adverse tariff scenario has increased since the June ECB meeting,” wrote analysts at UniCredit’s Investment Institute. “The 30% tariff on EU goods threatened by the U.S. is much higher than generally expected.”
Even so, financial markets have reacted with notable restraint, a sign that investors expect a more moderate outcome from the ongoing U.S.-EU negotiations. “The muted market response reflects expectations that the actual tariff rate will fall well below 30%,” UniCredit analysts added.
With talks still ongoing and an Aug. 1 deadline looming (though previous deadlines have quietly slipped), ECB policymakers are choosing prudence. The central bank wants to avoid acting prematurely before the full impact of any trade disruptions becomes clear. This caution is buoyed by recent signs that the eurozone economy remains resilient, giving the ECB flexibility to wait.
Eurozone growth in the first quarter reached 0.6%, a surprisingly strong result partly driven by accelerated shipments from exporters trying to beat the tariff clock. Inflation, once running in the double digits due to post-pandemic supply shocks and energy price surges following Russia’s 2022 invasion of Ukraine, has now cooled to the ECB’s 2% target.
Behind this inflation moderation is a combination of factors. Oil prices have softened globally, reducing input costs. Additionally, the euro has strengthened substantially—up 13% so far this year to $1.17—making imports cheaper and helping to restrain consumer price growth. A stronger euro also reflects uncertainty in U.S. markets, where investor confidence has been shaken by inflation volatility, concerns over long-term debt sustainability, and ambiguity surrounding future rate policy.
Still, the ECB is keeping an eye on currency dynamics. ECB Vice President Luis de Guindos recently cautioned that if the euro were to rise sharply above $1.20, it could create economic headwinds. “Any rapid moves over $1.20 could be much more complicated,” de Guindos said, signaling concern that an overly strong euro could hurt European exports and weigh on growth.
Nonetheless, the ECB is not known for actively managing the exchange rate, and policymakers insist that the euro’s rise is not a reflection of exceptional European strength but rather a sign of a weakened dollar. Investors are increasingly cautious about the U.S. outlook under Trump’s second term, which has introduced economic uncertainty through trade threats and budget volatility.
The ECB’s measured approach marks a shift from the urgency that defined its rate hikes in 2022–2023 and subsequent cuts that began in mid-2024. Those early rate increases were implemented to counter the inflation shock triggered by energy price spikes and tight post-pandemic labor markets. But with inflation now largely contained and growth relatively steady, the central bank is signaling that the era of dramatic rate swings is nearing its end.
ECB President Christine Lagarde echoed this view following the June 5 policy meeting, stating that the central bank is “getting to the end of a monetary policy cycle.” That sentiment is likely to shape Thursday’s meeting, as officials weigh when—and if—a final rate cut is warranted.
Analysts broadly expect one more cut to bring the benchmark rate closer to pre-crisis levels, but most believe the ECB will wait until its September meeting to make that move. By then, the results of the transatlantic trade talks should be clearer, and policymakers will have a better sense of how export-oriented industries and business investment are responding.
For now, the ECB’s pause sends a message of stability and caution—one intended to preserve market confidence while leaving room for maneuver if the U.S.-EU trade conflict intensifies.
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