The European Central Bank (ECB) has kept its core interest rates on hold after seven successive cuts, citing uncertainty over the threatened US trade war escalation.
The governing council has acted eight times in 12 months to bring down borrowing costs for the 20 European Union member states which use the euro.
The Bank first acted in a bid to help stoke economic growth as Russia-Ukraine war-linked inflation started to ease, with the pace of price growth across the eurozone now back at the ECB’s target of 2%.
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It is expected to remain stable but that would be jeopardised in the event of a damaging tit-for-tat escalation in Donald Trump’s trade war.
EU diplomats expressed optimism on Wednesday evening that a deal to avert the worst of the 30% baseline rate, threatened by the president against EU goods shipped to America, was close.
A failure to secure a truce by 1 August would see that higher rate kick in. But it was hoped that talks would settle on a 15% sum – with some exemptions also possible.
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The ECB’s estimates show that higher US tariffs would result in lower growth and, depending on the extent of EU retaliation, inflation in the euro zone over the medium term.
Its baseline projection from June, which incorporates 10% US tariffs, saw price growth below 2% over the next 18 months, aided by a stronger euro and weaker oil prices.
But the European Commission is readying several packages of measures, worth a combined €93bn (£81bn) that could be deployed in the event of a truce failing to be agreed. The first tranche is slated to take effect on 7 August.
In addition to targeting imports of US goods, the countermeasures could even be extended to services.
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Any retaliation would likely fan the flames of inflation in the euro area as the higher cost of many US products would likely be passed on down supply chains to consumers.
More rate cuts ahead?
Given the current uncertainty, the ECB said it in its statement that it would decide policy “meeting by meeting… based on its assessment of the inflation outlook and the risks surrounding it”.
Money markets were still pricing in a further interest rate reduction, probably by March, as inflation was seen at risk of going too low.
Even the ECB’s baseline projection from June, which incorporates 10% tariffs from the United States, saw price growth below 2% over the next 18 months.
Financial markets and economists are currently split on the prospects for further rate reductions.
The main deposit rate stands at 2% – down from 4% a year earlier.
