ECB Pause: “In a favourable position”, but trade uncertainties persist
As expected, the European Central Bank decided to leave interest rates unchanged at its 24 July meeting, marking the first pause in the current easing cycle since mid-2024. The decision keeps the deposit facility rate at 2.00% and the main refinancing rate at 2.15%, reflecting a more cautious and data-dependent approach amid a challenging global economic environment.
ECB President Christine Lagarde said in Frankfurt that the euro area is “in a favourable position”, with headline inflation reaching the 2% target. Nevertheless, she cautioned against complacency, noting that “we are in a wait-and-see phase” and stressing the need for caution while monitoring the impact of previous decisions on the economy and inflation dynamics.
The tone of the meeting was more restrained, shaped by rising geopolitical tensions and uncertainty surrounding trade negotiations with the United States. In June, headline inflation stood at 2.0% year on year, while core inflation remained slightly higher at 2.3%. Despite this convergence towards the ECB’s target, Lagarde warned that the effects of previous interest rate cuts are still being felt only gradually.
Among the external risks highlighted, particular attention is on the 1 August deadline for EU–US trade negotiations. Washington is considering imposing tariffs of up to 15% on European goods, a step back from earlier threats of 30% to 50%. In response, Brussels is preparing retaliatory measures that could affect up to €90 billion in US exports. France and other Member States are even considering activating the Anti-Coercion Instrument (ACI), the EU’s trade defence mechanism, should negotiations fail to make progress.
Against this backdrop, the ECB is maintaining a watchful stance. The Governing Council remains focused not only on domestic inflation developments but also on potential external shocks that could alter the euro area’s economic trajectory. Another relevant factor is the sharp appreciation of the euro against the US dollar, which has risen by around 14% since January. While this appreciation has helped contain imported inflation, it has also weighed on the competitiveness of European exports, prompting some firms to bring forward investment decisions in anticipation of potential tariffs.
Lagarde stressed that the ECB does not set exchange rate targets, although it acknowledges that exchange rate fluctuations are an important variable in the forward-looking analysis of inflation.
At the macroeconomic level, the ECB President outlined a scenario of cautious optimism. The euro area economy is showing signs of resilience, supported by robust private consumption, stable business investment (some of it front-loaded in anticipation of tariff risks), a solid labour market and continued wage growth. Labour costs are showing signs of moderation, and consumer expectations remain stable, with long-term projections anchored around the 2% target.
Nevertheless, risks remain tilted to the downside. Lagarde identified geopolitical instability, fiscal consolidation in certain Member States, and potential disruptions to supply chains as the main sources of pressure. “Should global conflicts ease or trade negotiations progress in a constructive manner, we could see a meaningful boost to economic activity,” she said. “But uncertainty itself is currently acting as a drag.”
The ECB President avoided providing any guidance, reiterating an approach based on “meeting-by-meeting” decisions, grounded in the latest data and in the evolution of risks. “We are not committing to any specific path,” she said. “Future decisions will depend on the evolution of inflation, incoming data, and the ongoing assessment of risks.”
The decision to keep interest rates unchanged was unanimous, reinforcing the shared commitment to ensuring monetary policy flexibility while safeguarding price stability over the medium term.
Following the meeting, the market revised downward its expectations for further rate cuts. Unlike at the start of the year, investors no longer anticipate additional easing measures in 2025. The focus has now shifted to 2026, with growing forecasts that the ECB may resume rate cuts in the second half of the year.
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