The European Central Bank (ECB) has kept interest rates on hold at 2%, marking the first pause in its rate-cutting cycle in over a year.
“Partly reflecting the Governing Council’s past interest rate cuts, the economy has so far proven resilient overall in a challenging global environment. At the same time, the environment remains exceptionally uncertain, especially because of trade disputes,” stated the ECB, which sets interest rates and manages monetary policy for the eurozone.
For Roelof Salomons, chief investment strategist for the Netherlands at the BlackRock Investment Institute, the pause doesn’t mark the end of the easing cycle. “Why move if you’re in a good place?” he said. “The ECB didn’t commit to anything. But this was a summer pause, not the end of the cycle.”
Salomons pointed to the tariff risk as a key reason for the ECB’s caution. While Lagarde mentioned potential inflationary disruptions from trade frictions, he sees a counteracting force in currency appreciation. “Tariffs could drag inflation lower in Europe, not raise it, given the chill from a stronger euro,” he noted. Still, he acknowledged that headline inflation has dipped below 2% and services inflation has eased, suggesting there’s room for further cuts. “We still see reasons for the ECB to cut one more time this year, but that’s less certain now.”
Richard Carter, head of fixed interest research at Quilter Cheviot, agreed that the ECB is pausing for clarity, not pivoting away from its easing stance. “After what has been a fairly aggressive rate-cutting cycle, the ECB has decided to hit the brakes and pause for breath,” he said. “This is likely a pause rather than a full stop.”
ECB cuts to 2%, but trade uncertainties keep markets guessing
For Carter, US trade policy looms large. “We’re just a week away from Donald Trump’s deadline before his ‘reciprocal’ tariffs could return. Even if there’s a deal, it may lack detail. The ECB will want to wait and see what’s actually agreed.” He also highlighted weak European growth and a soft dollar as supporting the case for renewed easing later in the year. “If inflation stays in check, pressure for a September cut could ramp up again. The ECB is still well ahead of most other central banks, but uncertainty remains the dominant theme.”
Konstantin Veit, portfolio manager at Pimco, believes the ECB is now nearing the end of its cycle. “With growth holding up and inflation at target, the cutting cycle may be drawing to a close,” he said. Veit added that the 2% policy rate is probably seen by many Governing Council members as the mid-point of a neutral range. “The ECB will want to preserve policy space and avoid reversing course too quickly.”
Still, Veit acknowledged the internal debate within the ECB about whether inflation might undershoot its target over the medium term. “There’s a risk balance. Some Council members are relaxed, others are not,” he said. “In our baseline, we think the ECB could still deliver a final cut in September to protect its 2% inflation projection for 2027—but that’s a low conviction view.”
Salomons pointed to rising fiscal spending as a driver of stickier inflation compared to the pre-pandemic norm, especially in “financials and industries linked to defence and infrastructure spending”. He also suggested Europe’s longer-term competitiveness depends on whether policymakers can drive productivity through supply-side reforms.
BlackRock upgraded its view on European equities to “neutral” earlier this year, but more hope hinges on reforms that address deeper weaknesses in the eurozone growth model. “Global policy shifts have created unease in Europe, but also a sense of urgency and realisation that the European growth model of past decades needs reform,” Salomons said.
The ECB said future decisions will be made on a “meeting-by-meeting” basis.
