After Eight Consecutive Rate Cuts, the European Central Bank Pauses as Expected; Future Policy Direction Remains Murky

On Thursday evening Beijing time, the European Central Bank (ECB) announced that its key policy rates would remain unchanged. Future decisions will be guided by the trajectory of tariff developments and other emerging conditions.

Per the ECB’s statement, the deposit facility rate, main refinancing operations rate, and marginal lending facility rate are held steady at 2.00%, 2.15%, and 2.40%, respectively. In contrast to the U.S. Federal Reserve’s approach, the ECB has executed eight consecutive rate cuts since June 2024, reducing the deposit facility rate from 4% to 2%, making the current pause widely expected.

The ECB’s release noted that inflation has now reached its medium-term goal of 2%. While the global landscape remains complex, economic performance within the eurozone has demonstrated resilience. Nevertheless, the forecast remains clouded with uncertainty, especially due to continuing trade disputes.

CCTV News reported that U.S. President Donald Trump previously communicated to the European Union that beginning August 1, a 30% tariff would be imposed on most EU exports—surpassing the 20% rate proposed in April. In response, EU member states have voted to enact retaliatory tariffs on U.S. goods valued at €93 billion. These tariffs are scheduled to be enforced should negotiations fail before August.

With the ECB having spent the past year in a sustained rate-cutting cycle, the market's focus has shifted from anticipating further cuts to questioning whether that cycle has come to an end. Currently, market participants anticipate at least one more rate reduction before year-end, possibly lowering the primary lending rate to 1.75%. Some forecasts suggest a further decrease to 1.5%, aimed at mitigating the effects of persistently soft inflation.

During the press conference following the policy announcement, ECB President Christine Lagarde affirmed that inflation within the eurozone now aligns with the ECB’s medium-term objective of 2%. She added that recent economic indicators broadly confirm the ECB’s earlier inflation projections, citing easing price pressures and slowing wage growth across the region.

Lagarde also highlighted that downside risks to growth remain prevalent. Intensified global trade conflicts and associated uncertainties may dampen exports, reduce investment levels, and constrain household spending. Conversely, swift resolution of trade and geopolitical challenges could improve investor confidence and drive economic momentum.

ECB Vice President Luis de Guindos previously remarked that, as European companies have shifted their operations forward to avoid anticipated tariff hikes in early 2025, economic growth in Q2 and Q3 may prove “nearly flat.” Thursday’s official communication also emphasized that increasing actual and expected tariffs, a strengthening euro, and sustained geopolitical risks are prompting businesses to take a more reserved investment stance.

Since the start of 2025, the euro has gained over 13% against the U.S. dollar, potentially placing additional downward pressure on inflation beyond initial expectations. Several ECB Governing Council members, including Banque de France Governor François Villeroy de Galhau, have cautioned that eurozone inflation may stay below target for an extended duration. Lagarde, like many of her peers, reaffirmed that the ECB’s policy decisions would remain data-driven, reviewed meeting by meeting.

She further commented that while the stronger euro could accelerate disinflation more than projected, the central bank continues to assess alternate scenarios—including those involving global supply chain fragmentation, which may elevate prices. Moreover, intensified fiscal expenditure and extreme climate events could also revive inflationary forces.