Summary
- The ECB kept key interest rates unchanged at 2% on July 24, 2025, pausing after eight consecutive cuts since June 2024.
- Policymakers set a “high bar” for any further rate cuts in September, awaiting significant new data and clarity on U.S.-EU trade talks.
- The ECB is taking a cautious “wait-and-see” approach due to exceptionally uncertain global conditions, notably rising EU-U.S. trade tensions.
- Inflation recently returned to the ECB’s 2% target but is projected to risk falling below target over the next 18 months.
- Market analysts are divided on the chances of a September rate cut, with many expecting it only if there is a major negative economic surprise.
- ECB officials and economists favor flexibility and data-driven decisions, avoiding commitments to a fixed rate path.
- Trade tensions, especially uncertainty over U.S. tariffs on EU goods, remain a key focus in ECB policy discussions.
- The euro has appreciated significantly, influencing inflation and economic growth dynamics in the eurozone.
- The ECB’s next decision is scheduled for September 11, 2025, with attention on updated inflation forecasts and trade negotiation results.
In an uncertain global economic landscape, the European Central Bank’s governing council decided to keep interest rates steady this July, signaling a high threshold for any further rate cuts in September as escalating trade tensions and mixed economic data cloud the outlook.
Why Did the ECB Hold Interest Rates Steady in July?
As reported by the editorial team at CNBC and confirmed by the ECB’s official press release, policymakers chose to hold the deposit facility rate at 2%, the main refinancing operations rate at 2.15%, and the marginal lending facility at 2.40%—levels established after the June 2025 rate cut. The ECB’s decision comes after an extended easing cycle that saw rates fall from a record high of 4% in early 2024 as inflation was brought back under control.
In a statement released by the ECB’s Directorate General Communications, the council underscored that “Inflation is currently at the 2% medium-term target. The incoming information is broadly in line with the Governing Council’s previous assessment of the inflation outlook. Domestic price pressures have continued to ease, with wages growing more slowly”.
David McHugh of the Associated Press noted that,
“The European Central Bank probably isn't going to cut interest rates again on Thursday, choosing to wait until it can measure the size of any economic blow from higher U.S. tariffs.”
His report highlights that policymakers believe “the ECB can afford to wait and see what the outcome of trade negotiations will be” due to relatively strong economic data in the eurozone.
How Are Trade Tensions Affecting ECB Policy?
Tensions between Brussels and the Trump administration have created considerable uncertainty. As cited by Bloomberg’s ECB policy coverage, most advisers still expect a possible quarter-point reduction in September but stress that it hinges on a resolution or clear direction in the ongoing tariff dispute:
“The European Central Bank is set to leave interest rates untouched for the first time in more than a year as it awaits clarity on President Donald Trump’s tariffs… Most still expect another quarter-point reduction in September, by which point a trade deal with the US should have been hashed out”.
Reuters financial correspondent explained:
“The outcome of trade discussions between the European Union and the United States remains uncertain; however, two diplomats with insider knowledge indicated that the two sides are moving toward an agreement that could impose a broad tariff of 15% on EU products. This scenario would be less favorable than the ECB's baseline predictions but an improvement over the ‘severe’ scenario…”
The ECB is wary that harsher tariffs could prompt further rate reductions to compensate for likely headwinds to growth and inflation.
Citing CFI’s economic blog,
“U.S. tariff threats potentially as high as 30% are weighing heavily on policy discussions. That level far exceeds the 20% worst-case scenario modeled in June. Analysts anticipate that ECB President Christine Lagarde would adopt a cautious stance, emphasizing the need to reevaluate downside risks without coming out as reactive”.
What Do Policymakers and Economists Say About Future Rate Cuts?
According to a detailed account from Reuters, multiple ECB policymakers said the bar for a September cut is “high” and the council would need substantial negative surprises or a significant downturn in new data to warrant action. Reuters quoted sources as saying,
“European Central Bank policymakers are setting a high bar for an interest rate cut in September and they would need to see a significant deterioration in the economic outlook to justify further easing.”
Michael Field, chief European equity market strategist at Morningstar, was quoted in the same context:
“The ECB's calls on interest rates have been a large success, cutting fast and hard over the last year... With inflation hovering around the 2% target and new ECB projections not due until September, policymakers appear in wait-and-see mode as fresh risks— including trade tensions—cloud the outlook”.
How Is Inflation Trending in the Eurozone?
As highlighted by the ECB’s own monetary policy minutes and restated on TradingEconomics, inflation finally reached the central bank’s 2% target in June but is projected to dip below that threshold for the next 18 months. The bank forecasts headline inflation to average 2.0% in 2025, 1.6% in 2026, and 2.0% in 2027, with the main drivers behind the subdued outlook being a strong euro, falling energy prices, and increased imports from China.
Disinflation is no longer a distant risk, as CFI’s Salomon Fiedler writes: “The ECB will prefer to wait and see if anything actually pushes them out of the equilibrium they find themselves in… Disinflation is here. The ECB’s own projections show inflation dipping to 1.4% by early 2026, far below its 2% target”.
What About Growth and Employment?
According to the ECB’s June projections, real gross domestic product (GDP) in the eurozone is expected to average 0.9% in 2025, 1.1% in 2026, and 1.3% in 2027. The report notes,
“While the uncertainty surrounding trade policies is expected to weigh on business investment and exports, especially in the short term, rising government investment in defense and infrastructure will increasingly support growth over the medium term. Higher real incomes and a robust labor market will allow households to spend more… making the economy more resilient to global shocks”.
Reuters further remarked, citing ING economist Bert Colijn, “an economy demonstrating slight growth, rising employment, and subdued inflation appears surprisingly stable”.
How Is the Strong Euro Impacting Policy Deliberations?
Several analysts, including those cited by CFI and TradingEconomics, agree that the recent appreciation of the euro—up 13-17% this year, reaching as high as $1.18—not only helps moderate inflation through cheaper imports but could also begin to weigh on eurozone growth and export competitiveness. ECB Vice President Luis de Guindos warned that “any rapid moves over $1.20 could be ‘much more complicated’” for monetary policy, as reported by AP.
What Is the Market Expectation for the Next ECB Meeting?
According to reporting by The Edge Malaysia,
“The European Central Bank left interest rates unchanged on Thursday after cutting eight times in a year, biding its time while Brussels and Washington try to strike a trade deal.”
Most observers expect any move to come at the September 11 meeting, contingent on data available at that time and the outcome of ongoing U.S.-EU talks. A Reuters poll of economists reflects a 50-60% probability of a 0.25 percentage point cut in September after rates remain steady in July.
UniCredit analysts stated, as quoted by AP, “the risk of an adverse tariff scenario has increased since the June ECB meeting… However, the response of financial markets to US President Donald Trump’s letter to the EU has been muted, and this seems to reflect expectations that the landing point for tariffs on EU goods will be materially below 30%.” The implication is that another rate cut will only follow “a material negative surprise”.
What Statements Did ECB President Christine Lagarde and Officials Make?
After the July meeting, President Christine Lagarde reiterated in the ECB’s press release that the council stands ready “to adjust all of its instruments within its mandate to ensure that inflation stabilizes at its 2% target in the medium term and to preserve the smooth functioning of monetary policy transmission”. Further, the council emphasized its “data-dependent and meeting-by-meeting approach,” underlining no pre-commitment to future moves without new evidence.
BNP Paribas analysts, as quoted by CFI, added that “the euro’s appreciation is now a key factor supporting a September cut” should trade negotiations deteriorate or if inflation data disappoints.
What Is the Impact on Bonds and Financial Markets?
As reported by MarketScreener, “Traders are increasingly confident of a September ECB pause, bond yields rise.” Investors are watching for signals from ECB policymakers—but, in the absence of any immediate economic shock, many expect the central bank to remain on hold until more clarity emerges regarding the global trade picture and its effects on the euro area.
What Is the ECB’s Stance on Asset Purchases?
The July policy statement clarified that the Asset Purchase Programme (APP) and Pandemic Emergency Purchase Programme (PEPP) portfolios are being unwound “at a measured and predictable pace,” with no further reinvestments of maturing securities. The Transmission Protection Instrument remains available to address potential disorderly market dynamics, ensuring price stability across all eurozone countries.
When Is the Next ECB Policy Decision?
The ECB’s next scheduled meeting is set for September 11, 2025. Market participants, policymakers, and businesses across Europe and beyond will be closely watching for new economic data and the resolution—or escalation—of U.S.-EU trade negotiations. As of now, the ECB remains firm in its commitment to flexibility and prudence, setting a high bar for further action on rates in the coming months.