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The European Central Bank has kept interest rates on hold as figures showed the eurozone economy maintaining a slow pace of economic growth.
In what was widely expected to be a pause before further cuts later in the year, the Frankfurt-based central bank shunned calls to reduce the cost of borrowing and held its main interest rate at 2% and the deposit rate at 2.15%.
The ECB is watching to see how the EU is affected by higher tariffs on goods exported to the US, which are expected to be part of a trade deal between Washington and Brussels.
Donald Trump earlier this month threatened a 30% tariff on EU imports in the president’s high-stakes global trade war. Financial markets are hopeful of a deal before the deadline of 1 August after the US reached an agreement to limit tariff increases with Japan earlier this week.
Central Bank officials are also concerned that an economic slowdown could be married to a drop in prices should China and other far eastern countries, also hit by US tariffs, dump cheap goods in European markets.
A rise in the value of the euro against a basket of other currencies is likely to make imports to the eurozone cheaper, which could also bring down inflationary pressures.
Mathieu Savary, chief strategist at BCA Research, said July’s decision could be a pause before steep cuts in rates at future meetings to bolster the eurozone economy and head off a period of deflation.
He said: “The ECB stood pat today, but this pause is not the end of the story. Disinflation is already deeply entrenched across the eurozone. Now, with a stronger euro, looming US tariffs, and intensifying Chinese competition, the region faces a new threat: deflation.
“The [ECB] governing council may soon find itself forced to cut rates more aggressively than markets currently anticipate.”
The ECB said in its report that while the economy remained “resilient”, it was mindful of looming tariff threats. “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,” it said.
Financial markets expect the ECB to hold rates at its next meeting in September before cuts resume again in December.
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The decision came after surveys of the private sector across the 20-member currency bloc showed a modest rise in output despite a long period of stagnation in its two largest economies of France and Germany.
Most countries in the eurozone have historically low levels of unemployment and low inflation, giving them a strong platform for growth.
However, the threat of increased tariff from Washington, and a possible 50% tariff on exports of steel to the US, has caused many firms to hold back investment and new hiring.
Annual inflation in the eurozone was 2% in June, up from 1.9% in May. US inflation rose to 2.7% in June from 2.4% in the previous month while inflation hit 3.6% in the UK in June.
