ECB holds rates in July

Bank pauses easing cycle: At its meeting on 23–24 July, the European Central Bank (ECB) decided to keep its deposit rate at 2.00%. It also held its refinancing and lending rates at 2.15% and 2.40% respectively. The decision followed seven successive interest rate cuts and aligned with market expectations.

Within-target inflation and resilient economic activity prompt the hold: The decision was driven by the fact that inflation is currently at the 2.0% target, and domestic price pressures have continued to ease, as evidenced by recently slower wage growth. Additionally, the hold was motivated by the resilience of the economy, partly due to past interest rate cuts, despite the uncertainty regarding trade disputes.

Additional cut now less likely: ECB’s President Christine Lagarde reiterated that the Bank is “well-placed to navigate the current uncertainty” and added that it will not be swayed by near-term data as long as its medium-term view is unchanged. Moreover, she highlighted that the labor market is historically strong and that public investment would boost momentum ahead, thus lowering the need for additional monetary policy easing. Most of our panelists still expect the Bank to deliver a 25 basis points cut by end-2025. That said, in line with recent ECB guidance and the trade deal between the EU and the U.S., our panelists could start revising their forecasts of a hold. The next meeting is set for 10–11 September.

Panelist insight: Carlos Castellano and Maria Martinez, economists at BBVA Research, commented: “On balance, President Lagarde successfully steered market expectations away from a fully priced-in additional rate cut this cycle—to a terminal deposit rate of 1.75%—towards a more cautious stance […]. Future moves will remain contingent on incoming data and global developments, particularly the outcome of ongoing trade discussions, which for now appear likely to conclude not too negatively for Europe. If that scenario materializes and no significant negative surprises emerge on inflation, activity, or the euro, the relatively hawkish tone observed today—somewhat unexpectedly—suggests that the ECB may already be at the end of its easing cycle.” ING’s Carsten Brzeski said: “Admittedly, taking today’s meeting at face value, the bar for yet another rate cut this year has clearly been raised. Still, we think that actual inflation could come in lower than the ECB expects and hard macro data could rather disappoint over the summer. This, together with the fact that the ECB’s June projections actually included a terminal rate of 1.75%, still encourages us to see one final rate cut at the September meeting. But our conviction has become weaker today.”

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