Market News

The European Central Bank (ECB) has chosen to keep interest rates steady as uncertainty persists over the threat of higher US tariffs.

The announcement by the ECB's Governing Council was widely expected, especially since inflation in the 20-nation eurozone stood at the central bank's 2% target in June.

The benchmark deposit rate, which is important for both banks and individual savers, remains at 2%, down from a high of 4% in June 2024. Before Thursday's rate decision, the ECB had made seven consecutive rate cuts.

Explaining the move, the ECB said: "Domestic price pressures have continued to ease, with wages growing more slowly. Partly reflecting the Governing Council's past interest rate cuts, the economy has so far proven resilient overall in a challenging global environment."

But it also stressed in a clear reference to pending US tariffs: "At the same time, the environment remains exceptionally uncertain, especially because of trade disputes."

While the ECB has been able to tame consumer prices that rocketed after the coronavirus pandemic and Russia's invasion of Ukraine in 2022, a new threat has emerged this year: higher US tariffs.

US President Donald Trump has vowed to impose 30% tariffs on imports from the European Union as of August 1, unless a new trade deal between the allies can be agreed. The EU has said it ready to hit back with tariffs on US goods.

The consequences of such a trade fight are difficult to assess, analysts say, and this uncertainty likely influenced the ECB's decision to pause rate changes for now.

Reports by the Financial Times, broadcaster CNBC and others said the two sides were closing in on a deal with 15% tariffs on both sides, similar to one agreed with Japan this week.

The ECB emphasised that it was "determined" to ensure that inflation stabilized at 2%.

According to recent ECB predictions, eurozone inflation could come in on target for the year as a whole. The rate is forecast to decline to 1.6% next year, well below target rate.

The bank has in the past stressed that its target is symmetrical and that falling prices are not its aim for fear that companies could postpone investment and consumers could delay purchases.