The European Central Bank has kept interest rates on hold as figures showed the eurozone economy maintaining a steady pace of economic growth amid low inflation.
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’s president, Christine Lagarde, said the eurozone was in “a good place” and that the cost of living crisis was in the past. “Our job is now to look at what is coming,” she added.
The ECB, which has cut interest rates eight times in the last nine months from a high of 4%, 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.
This month, Donald Trump threatened a 30% tariff on goods imported from the EU as part of his 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 on Tuesday.
Central Bank officials are also concerned that an economic slowdown could be married to a drop in prices should China and other east and south-east Asian 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.
Lagarde said the risks to the economy remained “tilted to the downside” and that among the main threats to growth were a worsening of the conflicts in the Middle East and Ukraine and global trade tensions that could “dampen exports and drag down investment and consumption”.
However, she said the ECB was “well-positioned to wait and see” because inflation was at 2% and that the central bank’s projections pointed to the rate stabilising at that level in the medium term.
Lagarde added: “Wage increases are coming down and growth has been developing in a relatively favourable way. It means we are now confident that the inflation shock of the past few years is behind us and our job is to look at what is coming.”
Mathieu Savary, the chief strategist at BCA Research, said July’s decision could be a pause before steep cuts in rates at future meetings to prevent the eurozone economy from stalling 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.”
In its report, the ECB said: “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.”
Financial markets expect the the central bank to hold rates at its next meeting in September before cuts resume again in December.
The July 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% levy 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.
