European Central Bank holds interest rates as tariff turmoil keeps policymakers on edge

The European Central Bank on Thursday kept interest rates steady amid major economic uncertainty, as the European Union scrambles to negotiate a trade agreement with the U.S. before the end of the month.

The ECB has cut interest rates at each of its four meetings so far this year, taking its key deposit facility from 3% in January to 2% in June. Last year it reduced rates from a record high of 4%.

“The environment remains exceptionally uncertain, especially because of trade disputes,” the ECB said in a statement, adding that its outlook for price rise growth remained largely unchanged.

While annual inflation in the euro area hit the central bank’s 2% target last month, traders widely expected a hold in July — in large part due to geopolitical volatility. The U.S. is the EU’s biggest bilateral trade and investment partner and the 27-member bloc exported 503 billion euros ($590 billion) in goods to the States last year.

As of Thursday, the future of that trade relationship remained up in the air, with one possibility being a 15% baseline tariff rate on all EU imports to the U.S., along with retaliatory measures on the EU’s part.

ECB officials have been suggesting for some time that their work in bringing down inflation is nearly done, as it hunts for the so-called “neutral” level at which rates are neither stimulating, nor restricting growth. ECB President Christine Lagarde told CNBC in late April that the disinflation process was “nearing completion.”

ECB Chief Economist Philip Lane told CNBC earlier this month that “the last cycle is done, bringing inflation down,” but that policymakers would remain alert to any changes in the medium-term outlook.

Julien Lafargue, chief market strategist at Barclays Private Bank, said ahead of the July meeting announcement that the ECB would remain “cautious” while questions around tariff rates remain unanswered, and that the central bank would likely wait until updated staff growth and inflation forecasts are released in September before making further moves.

Lafargue added that investors would instead be focused on messaging on whether recent strength in the euro — which can have a deflationary effect as imports get cheaper — was concerning the central bank.

The euro was 0.15% lower against the U.S. dollar following the ECB decision, at $1.175. That is up from a rate of around $1.026 at the start of the year, as investors have broadly shifted away from the greenback due to political and fiscal uncertainty.

“We may see one more [rate] cut later this year, but the ECB is waiting to see if the threatened imposition of U.S. tariffs of 30% on EU goods from 1st August can be avoided,” Joe Nellis, economic adviser at accountancy MHA, said in emailed comments Thursday.

“If a U.S.-EU trade deal isn’t reached beforehand, the ECB may look at cutting rates again in September to counter-act the barriers to economic growth that tariffs will impose.”