ECB Holds Rates Steady at 2% – Market Awaits September for Potential Cut
The ECB kept interest rates unchanged at 2%, aligning with market expectations. Analysts widely anticipated this pause, and the OIS market had priced in no change for July. Most economists expect the rate cut to come in September.
We could expect rates to move below the current terminal rate if the U.S. were to impose 30% tariffs; however, such an outcome appears unlikely. Current headlines suggest a more moderate 15% tariff scenario, like what we’ve seen with Japan. Markets are currently pricing in one rate cut in total, though the timing remains uncertain. Terminal rate expectations are anchored around 1.5%–1.75%.
ECB Statement Highlights
The ECB emphasized that it is not pre-committing to a specific rate path. Instead, it will adopt a data-dependent, meeting-by-meeting approach to setting monetary policy.
While the economy has demonstrated resilience, the central bank warned that risks to the outlook are still tilted to the downside.
Press Conference Insights
- On tariffs: President Lagarde noted it’s difficult to assess the impact of tariffs on inflation, as they could generate both inflationary and disinflationary effects.
- On future hikes: When asked about rate hikes in the event trade uncertainty eases, Lagarde didn’t rule them out. She said reduced uncertainty could support consumption and investment, but added, “The future will tell” what the outcome will be.
- On the euro: She reiterated that the ECB does not target exchange rates but does consider them in inflation forecasts.
Following the press conference, markets reduced the probability of a September rate cut to 28% from 40%, interpreting the tone as a hawkish pause. Sources Story – ECB officials indicate that those expecting another rate cut will face an uphill battle, as their baseline for September is to keep rates on hold.
Key Takeaways
The ECB kept rates unchanged at 2% and emphasized a data-dependent, meeting-by-meeting approach without committing to a specific policy path. While markets and analysts expect a rate cut in September, uncertainty remains, especially around external risks like U.S. tariffs, which currently appear less likely to drive a policy shift. Lagarde acknowledged the economy’s resilience but flagged downside risks, and markets interpreted the tone as a hawkish pause, with the probability of a September cut dropping to 28%.