The European Central Bank is expected to keep interest rates unchanged on Thursday, as inflation remains within its target range. However, mounting trade and political challenges are pushing policymakers to keep the option of monetary easing on the table.
The Bank had cut its key interest rate to 2% in the year ending June and has kept it steady since, arguing that the eurozone economy comprising 20 countries remains in “good shape,” while not ruling out further easing in the future.
Economic data released over the summer reinforced this positive assessment, giving policymakers more time to evaluate the impact of U.S. tariffs, increased government spending in Germany, and political turmoil in France on growth and inflation.
ECB President Christine Lagarde is expected to maintain the cautious approach she adopted in July, when she refrained from giving clear signals about the future path of interest rates, emphasizing a strategy of non-committal communication.
Still, she is unlikely to completely close the door on additional rate cuts, especially with forecasts pointing to inflation temporarily dipping below the 2% target next year. This leaves open the possibility of a final “precautionary” cut later this year.
Analysts note that the risk of inflation remaining below target for an extended period likely to become clearer in December when the ECB publishes its projections through 2028 indicates a bias toward easing, even if discussions are limited to just one final cut. This suggests that the monetary policy adjustment cycle is nearing its end, with rates expected to remain relatively stable for an extended period.
Investor expectations currently price in a 50%–60% chance of one last cut by next spring, while the U.S. Federal Reserve is projected to deliver as many as six cuts by the end of next year.
The ECB will announce its decision at 12:15 GMT, followed by Lagarde’s press conference at 12:45 GMT.
The key debate among policymakers revolves around risk assessment. Hawkish members argue that the eurozone economy has shown unexpected resilience to trade tensions, with growth still supported by robust private consumption. They cite a recovery in industrial production and increased government spending in Germany as signs that growth will continue at a moderate pace. Despite U.S. tariffs on EU imports reaching 15% higher than anticipated European companies are demonstrating adaptability, with the prospect of a trade deal helping to mitigate the impact.
On the other hand, dovish policymakers stress that the full effects of tariffs have yet to materialize and could weigh on an already fragile growth outlook, potentially curbing consumption again. They fear this could push inflation lower next year, forcing companies to adjust pricing and wage policies, thereby entrenching subdued price growth similar to the pre-pandemic period.
Meanwhile, the Fed’s anticipated pivot toward rate cuts could support the euro against the dollar, adding further downward pressure on prices in the eurozone.
Some economists expect the ECB to keep rates steady this year but see the potential for a cut early next year if inflation expectations weaken alongside declining actual inflation.
Adding to the challenge is mounting political uncertainty in France, marked by a sharp rise in French bond yields. While the ECB has tools to intervene, they are only deployed in cases of unjustified and disorderly increases in borrowing costs a condition not currently met, given France’s high debt levels and sluggish economic growth.
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