European Central Bank Keeps Rates Unchanged as Trade Tensions Persist

The European Central Bank (ECB) decided on Thursday to keep its key deposit facility rate unchanged at 2%, maintaining the pause it introduced in June after last year’s record high of 4%. The move was widely expected, with markets pricing in a 99% chance of no change ahead of the decision.

Inflation on Target, But Caution Remains

Inflation in the eurozone is hovering close to the ECB’s 2% medium-term target. In its statement, the bank noted that its outlook remains broadly unchanged but emphasized that future moves will depend on incoming data. President Christine Lagarde reiterated that the Governing Council is not committing to a fixed path for rates, preferring a meeting-by-meeting approach.

Although a July trade agreement with the U.S. eased some concerns, it also introduced new challenges, such as unresolved provisions for wine and spirits. Trump’s recent threats of retaliation after Google was fined in Europe have heightened fears of escalating tensions.

Eurozone growth remains sluggish, with GDP expanding only 0.1% in the second quarter after stronger results earlier in the year. Lagarde acknowledged the risks, warning that renewed trade friction could depress exports, investment, and consumption.

Mixed Economic Outlook

Economists remain divided about what comes next. Some believe the ECB may need to cut rates again if tariffs weigh heavily on growth and demand. Others argue the easing cycle has ended, citing resilient labor markets and stronger domestic demand.

New forecasts show headline inflation averaging 2.1% in 2025, 1.7% in 2026, and 1.9% in 2027, broadly in line with earlier expectations.

Featured image credit: Mika Baumeister via Unsplash

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