The chances of another European Central Bank (ECB) rate cut appeared to diminish this week.
Policymakers in Frankfurt kept interest rates steady for a second straight month, a move or non-move that had been priced in by markets, while marginally upgrading their inflation expectations for next year.
However, it was ECB president Christine Lagarde’s comments about the inflation risk being “more balanced” that were interpreted to mean the bank was content with the current rate.
It chimed with recent comments from Bundesbank president, Joachim Nagel, who described the euro zone economy as being in a “kind of equilibrium,” with inflation and interest rates both at 2 per cent.
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The ECB has cut rates eight times since June 2024, bringing them down from a record 4 per cent and providing some welcome relief for mortgage holders.
[ ECB keeps rates on hold amid trade uncertaintyOpens in new window ]
[ The Irish Times view on ECB interest rates: now near their floorOpens in new window ]
However, with inflation across the bloc now at the bank’s target rate of 2 per cent and the economic outlook uncertain because of US tariffs, it has paused the current cycle of cuts.
“The market has come away from the September ECB meeting even more convinced that the terminal rate has been reached,” Deutsche Bank said in a research note.
“It is still a very uncertain world and the ECB is right not to pre-commit,” it said.
“At the same time, the ECB appears increasingly comfortable with 2 per cent policy rates,” Deutsche said. “With this stance, the ECB can absorb some economic uncertainty and volatility and tolerate some deviations of inflation from target.”
The initial fallout from US president Donald Trump’s protectionist trade agenda has been a stronger euro-dollar exchange rate, which had a disinflationary impact on the euro zone economy (the cost of energy has become cheaper), lessening the need to cut rates.
The fast-tracking of product into the US ahead of tariffs has also boosted EU exports and growth in the process. As part of the Thursday’s rate announcement, the ECB upgraded its economic growth forecast for the bloc this year to 1.2 per cent from 0.9 per cent.
The positives, however, must be benchmarked against the negatives: political turmoil in France and the diminishing outlook for exports on the back of tariffs.
Hence Lagarde’s “more balanced” risk comments and the sense that the ECB has reached the end of the current cycle.
