The European Central Bank is expected to pause interest rate cuts tonight, awaiting clarity on the impact of Trump's tariffs

According to Zhitong Finance APP, tonight, the European Central Bank is expected to remain steady, marking its first pause in interest rates in a year as it waits for clarity on the impact of U.S. President Trump's tariff policy on inflation. The vast majority of economists anticipate that the benchmark deposit rate will remain at 2% on Thursday. Most still expect a 25 basis point cut in September, by which time a trade agreement with the U.S. should be finalized, and new quarterly forecasts for the Eurozone will be released.

Although ECB officials generally agree to halt the monetary easing policy that has lasted for a year this month, they do not have a unified opinion on how to act after the summer. Some are willing to take further action, concerned that inflation rates may remain below the recently achieved 2% target. Others warn that increased public spending could push prices higher in the future.

Ruben Segura-Cayuela, head of European economic research at Bank of America, stated, "There may be reason to cut rates in July, but currently it feels like everyone wants to maintain the status quo. You can reassess everything in the next round of forecasts in September."

Interest Rate Decision

The European Central Bank will significantly lower borrowing costs by 200 basis points between June 2024 and June 2025, placing the deposit rate within a range it estimates will neither suppress nor stimulate the economy. Following last month's rate cut, Lagarde stated that the ECB is "in a favorable position" to address various challenges, from trade policies to wars.

Although many officials have expressed similar views, Bank of France Governor Villeroy and Bank of Italy Governor Panetta believe that further easing may be necessary. In fact, the June forecast already assumed another rate cut. However, ECB Executive Board member Schnabel opposed this view, arguing that the threshold for further easing is "very high."

Paul Hollingsworth, chief European economist at BNP Paribas, believes that in the face of increasing uncertainty, different responses have been adopted. He said, "Some want the ECB to respond relatively less aggressively and prefer to act cautiously. Others advocate for a more flexible and agile response."

Economic Outlook

Trump has threatened to impose a 30% tariff on the EU starting August 1, increasing uncertainty. Although negotiations are ongoing, the risk of worse outcomes than envisioned in the June forecast has risen. Even in the ECB's most severe scenario for trade, it only predicts a 20% tariff on all European goods.

The worse the final results, the greater the impact on the European economy, and inflation may also be further lowered. European Central Bank Vice President Luis de Guindos warned that economic output in the second and third quarters may stagnate.

David Powell, a senior economist at Bloomberg Eurozone, stated: "To mitigate the impact of tariffs already implemented by the U.S., we expect a 25 basis point rate cut in September from the current 2%. Our baseline forecast includes industry tariffs on pharmaceuticals, which may require further easing in December, bringing deposit rates down to 1.5%."

The highlight is the significant increase in planned military and infrastructure spending over the next few years. This continues to boost optimism after better economic performance in early 2025, aided by U.S. tariffs. Another positive factor this week is that over 60 top German companies announced new projects worth more than €100 billion (approximately $117 billion).

Euro Strength

The strength of the euro will also be scrutinized. Although it has stabilized recently, it has appreciated 13% against the dollar this year, raising concerns among some policymakers as it makes export goods more expensive while lowering the cost of imports.

In July, de Guindos stated that if the euro/dollar exchange rate breaks above 1.20, the situation would become "much more complicated." Latvia's central bank governor, Mārtiņš Kazāks, separately indicated that if the euro appreciates significantly further, it could "disrupt the balance," prompting another rate cut.

Not everyone shares this view: Schnabel believes these concerns are "somewhat exaggerated." Others argue that it is difficult to complain about the strength of the euro while also calling for it to play a larger role on the international stage.

Communication Challenges

While the European Central Bank's policy statement and Lagarde's remarks are unlikely to undergo significant changes, investors may pay particular attention to how officials articulate the decision to maintain interest rates. For example, using the term "pause" could trigger expectations that rate cuts are not yet over.

For Morgan Stanley's Chief Economist for Europe, Jens Eisenschmidt, assessing the risks facing the economy will also be crucial. In a report to clients, he stated that if, as he expects, risks are still perceived to be skewed to the downside, "this will become an important communication tool to indicate that a rate cut will occur in September."

Schnabel recently stated that the risks to the economic growth outlook are now "more balanced."

Official Changes

The July meeting was the first since Olaf Sleijpen became a council member. He has just taken over as the head of the Dutch central bank. Like his predecessor Klaas Knot, the 54-year-old economist is also seen as another moderate hawk At the same time, hardline hawk Robert Holzmann, the Governor of the Austrian Central Bank, will attend the relevant meeting for the last time before his retirement in August. He will be succeeded by Martin Kocher, the Austrian Minister of Labor and Economy, who has recently participated in discussions regarding central bank independence. Mario Centeno, the Governor of the Bank of Portugal, may also be about to step down. His term recently ended, and he is currently continuing to work in an interim management capacity, while the government is likely to make a decision regarding his future this week