European Central Bank Likely to Hold Rates Amid Tariff Concerns

Despite the economic risks posed by the tariff policies of the , the European Central Bank is likely to maintain its current stance and refrain from lowering interest rates during its upcoming meeting. This decision comes as policymakers prepare for a seven-week summer recess, with the final decision expected to be made on Thursday. The central bank is anticipated to keep the interest rate at 2% and delay any response to the 30% tariff threat until the policy is implemented and its impact can be assessed.

This cautious approach is seen as a prudent move, given that most officials are about to embark on a long vacation. The central bank is expected to reiterate that inflation has reached its target level and will postpone the assessment of economic prospects until the September 10-11 meeting, when new quarterly forecasts will be released.

However, policymakers are aware of the looming crises. In addition to the tariff concerns, the strengthening of the euro is putting pressure on price prospects, and exporters may face increased challenges. Meanwhile, France's expanding public finances could potentially reignite political instability.

Against this backdrop, while the Governing Council of the European Central Bank continues to adhere to its policy of making decisions on a meeting-by-meeting basis, there is a growing consensus within the council that the probability of a rate cut in September is increasing. Economists have suggested that the President of the European Central Bank may emphasize the downward risks to economic growth in the opening statement of the press conference on Thursday.

Economic reports scheduled for the coming week will provide a basis for their deliberations. These reports include the European Central Bank's own bank lending survey, which will be released on Tuesday, the consumer confidence index on Wednesday, and the purchasing managers' index (PMI) from the eurozone and other major economies on Thursday, just hours before the European Central Bank's interest rate decision is announced.

Other key indicators, such as Germany's closely watched Ifo business climate index and Italy's economic sentiment index, will be released on Friday. Additionally, EU envoys are expected to meet as early as this week to plan for a no-deal scenario in response to the hardening stance on tariffs from the U.S. side. As the August 1 deadline approaches, the U.S. has taken a firmer position on tariffs, although all parties still hope for a breakthrough in negotiations before the deadline. However, sources indicate that there has been no significant progress since the Washington talks last week, and negotiations are expected to continue over the next two weeks.