ECB Delays Final Rate Cut to December Amid Trade Uncertainty

The European Central Bank's (ECB) path for interest rates remains uncertain, with the final rate cut potentially delayed until December. A survey of economists indicates that while the majority expect the ECB to hold rates steady at the upcoming policy meeting, there is a growing consensus that the last rate cut could be postponed until later in the year. This delay is primarily due to increased uncertainty in trade relations, which has led to a more cautious approach from the ECB.

Officials at the ECB have signaled a pause in rate cuts for the month, with the president stating that the bank is in a good position to address any challenges in economic growth and inflation. However, there is a lack of consensus among ECB members regarding the future direction of policy. Some members, such as Isabel Schnabel, believe that the threshold for further rate cuts is high, while others, like Olli Rehn and Francois Villeroy de Galhau, are concerned about the impact of a stronger euro on inflation targets.

Economists are divided on the timing of the final rate cut. Approximately one-quarter of respondents believe that the ECB has already completed its rate cuts, while nearly half expect the final cut to occur in September. A smaller percentage anticipates the cut to happen in December. Some economists, like Mariano Valderrama, predict that December could mark the beginning of a rate hike cycle, although this view is not widely shared.

The ECB's decision will be influenced by various factors, including the outcome of trade negotiations between the EU and the US. The uncertainty surrounding these talks has led to a more cautious stance from the ECB, as it seeks to avoid prematurely signaling the end of the easing cycle. Economists like Julie Ioffe highlight the importance of these negotiations in shaping the ECB's policy decisions, as they could significantly impact the eurozone's economic outlook.

The ECB's strategy aims to avoid misleading the market about the likelihood of further rate cuts. Currently, the market expects a less than 50% chance of a rate cut in September, but a near-certainty of a cut by the end of the year. The ECB will update its economic forecasts in September and December, providing more clarity on its policy direction. Analysts are divided on the inflation outlook, with some seeing short-term downside risks and others focusing on medium-term upside risks.

The strength of the euro is another critical factor influencing the ECB's decisions. While the euro has appreciated significantly against the dollar, the ECB's vice president has expressed concerns about the potential economic impact if the currency reaches 1.20. However, many economists believe that the euro could rise further without causing significant issues, as long as the appreciation is gradual. The ECB's approach to managing these risks will be crucial in determining the future path of interest rates.