Eurozone Holds Rates Steady as Inflation Meets Target and Trump Pressure Fades

European Central Bank (ECB) officials are increasingly confident they can maintain the benchmark interest rate at 2% during the September meeting, despite ongoing economic uncertainties and trade tensions. Recent data indicates that inflation has stabilized at the central bank’s target of 2%, while economic growth remains in line with the ECB’s projections. According to sources familiar with the matter, officials do not see the recently finalized trade deal between the European Union and the United States as a major threat to economic stability. This trade agreement has reduced, but not eliminated, global uncertainty, which remains a concern due to the unpredictable nature of U.S. policy under President Donald Trump. Despite this, the ECB has not observed any significant deterioration in inflationary pressures that would justify an interest rate cut [1].

The eurozone’s inflation rate remained steady at 2% in July, according to Eurostat, aligning with the ECB’s 2% target. This figure marks a continuation of the trend observed in recent months, as inflationary pressures have gradually subsided following the post-pandemic and post-Ukraine conflict inflation surge. The ECB has already implemented a series of rate cuts over the past year, bringing the key deposit rate down from a record high of 4%. The central bank’s cautious approach is reinforced by recent data on wage growth, which shows a rise in second-quarter negotiated wages by 4% year-on-year. While this increase is below the peak seen in 2024, it still supports the ECB’s decision to hold rates steady, as officials are closely monitoring wage growth for signs of inflationary pressures [2].

Inflation across the eurozone is being driven primarily by services, followed by food and non-energy industrial goods. Eurostat noted that annual inflation in the EU rose slightly to 2.4% in July, up from 2.3% in June. The most significant inflationary contributions came from Romania, Estonia, and Slovakia, where annual inflation rates exceeded 5%. Meanwhile, countries like Cyprus, France, and Ireland recorded much lower rates, below 2%. The divergence among member states highlights the uneven economic recovery across the eurozone. In contrast, the ECB’s own inflation projections anticipate further declines in 2026, with inflation expected to return to 2% in 2027 [2].

ECB President Christine Lagarde has emphasized that the central bank remains in a “wait-and-watch” position and that any future monetary policy decisions will be made based on incoming data. This approach is also reflected in the broader central bank community. While some officials believe the ECB has completed its rate-cutting cycle and should preserve policy flexibility for future shocks, others are concerned about the risk of a persistent inflation undershoot. These differing views underscore the complexity of the ECB’s current policy environment, where officials must balance the need to avoid overstimulating the economy with the risk of not acting quickly enough in the face of unexpected shocks [1].

Looking ahead, economists and traders remain divided on the timing of the next rate cut. Most expect a final quarter-point reduction in December, three months later than previously anticipated. However, the probability of a September cut has dropped significantly, with traders assigning less than a 50% chance of such an outcome. The ECB’s Governing Council has also clarified that while quarterly forecasts are an important input in policy decisions, they are not a prerequisite for taking action. This flexibility allows the ECB to respond to new data as it becomes available, rather than following a predetermined path. A return to rate cuts, if it occurs, is likely contingent on a major economic setback or a significant downward revision to the inflation outlook—scenarios that officials currently consider unlikely [1].

The ECB’s cautious stance contrasts with the position taken by U.S. President Donald Trump, who has repeatedly criticized Federal Reserve Chair Jerome Powell for not lowering U.S. interest rates to match the ECB’s level. However, analysts argue that the structural differences between the U.S. and eurozone economies justify the current divergence in policy rates. U.S. interest rates have historically been higher due to stronger growth and inflation, and lowering them to European levels would likely result in inflation overshooting the Fed’s target. This analysis underscores the importance of tailoring monetary policy to each region’s unique economic conditions [4].

Source:

[1] ECB Officials Sticking to Steady-Rates Plan After Trade Deal (https://www.bloomberg.com/news/articles/2025-08-22/ecb-officials-to-stick-with-steady-rates-plan-after-trade-deal)

[2] Eurozone inflation remains stable at 2% in July (https://uk.finance.yahoo.com/news/eurozone-inflation-stable-july-104216061.html)

[3] Euro-Zone Wage Growth Quickens, Backing ECB Caution on Rates (https://www.bloomberg.com/news/articles/2025-08-22/euro-zone-wage-growth-quickens-backing-ecb-caution-on-rates)

[4] Trump wants the Fed to lower rates like the ECB but overlooks one or two or three important things (https://blog.rangvid.com/2025/08/17/trump-wants-the-fed-to-lower-rates-like-the-ecb-but-overlooks-one-or-two-or-three-important-things/)

[5] ECB Officials Judge They Can Hold Rates Steady in September (https://www.bloomberg.com/news/newsletters/2025-08-22/ecb-officials-judge-they-can-hold-rates-steady-in-september)