As the economy is doing relatively well and the US trade talks are still underway, analysts believe that the European Central Bank (ECB) is not in a rush to lower the benchmark interest rate.
President Christine Lagarde said after the last policy meeting on 5 June that the central bank is "getting to the end of a monetary policy cycle."
The ECB has already cut rates eight times since June 2024. The ECB's deposit facility rate, which banks may use to make overnight deposits, stands at 2%, down from a record high of 4%.
The monetary authority for the 20 countries that use the euro currency has been lowering rates to support growth after raising them in 2022-2023 to snuff out inflation caused by Russia's full-scale invasion of Ukraine and the rebound after the pandemic.
Analysts think there could be one more rate cut coming, but only in September, as by then tariff negotiations between the EU's executive commission and the Trump administration should be complete.
Could tariffs influence the ECB's monetary policy?
Trump first set a 20% tariff for EU goods, then threatened 50% after expressing displeasure at the pace of talks. Later he sent the EU a letter informing officials of a potential 30% tariff.
The talks are up against the 1 August deadline, but earlier deadlines have slipped as discussions were prolonged.
The decision to hold rates unchanged will be "uncontroversial" among members of the bank's rate-setting council, said analysts at UniCredit's Investment Institute.
"In light of recent events, the risk of an adverse tariff scenario has increased since the June ECB meeting. The 30% tariff on EU goods threatened by the US is much higher than generally expected," the UniCredit analysts wrote.
"However, the response of financial markets to US President Donald Trump's letter to the EU has been muted, and this seems to reflect expectations that the landing point for tariffs on EU goods will be materially below 30%.
With signs of economic activity holding up reasonably well, "the ECB can afford to wait and see what the outcome of trade negotiations will be."
The ECB's rate cuts have helped support economic activity by lowering the cost of credit for consumers and businesses to purchase goods. Higher rates have the opposite effect and are used to cool off inflation by reducing demand for goods.
Growth in the eurozone was relatively strong at 0.6% in the first quarter - though that was partly due to rushed shipments of goods trying to beat the tariffs. Inflation has fallen from double digits in late 2022 to 2% in June, in line with the ECB's target. A stronger euro, which lowers the price of imports, and softer global prices for oil have helped keep inflation moderate.
The stronger euro, up 13% this year at $1.17, has attracted attention as a potential damper on growth, and ECB Vice President Luis de Guindos said any rapid moves over $1.20 could be "much more complicated." But the ECB typically does not target the exchange rate, and the euro's rise is considered to be less the result of Europe's strength and more the result of a weaker dollar weighed down by investor uncertainty about the future path of inflation, growth and government debt in the US.
