Like the Fed, European Central Bank holds off on rate cuts amid tariff upheaval

Globe and Mail

2 days ago

FRANKFURT, Germany (AP) — The European Central Bank left interest rates unchanged Thursday, hitting pause on rate cuts amid uncertainty over US President Donald Trump's tariff onslaught and high-stakes trade talks marked by threats of drastically higher import taxes on European goods.
Bank President Christine Lagarde said the current economic environment and the potential impact of higher tariffs was 'exceptionally uncertain." Higher tariffs could slow investment, growth and inflation - or they could be inflationary by disrupting existing supply chains for parts and raw materials.
'The sooner this trade uncertainty is resolved ... the less uncertainty we will have to deal with," she said. 'And that would be welcome by any economic actors, including ourselves...If trade tensions are resolved in short order, it will clear some of the uncertainty that we have weighing on the decision-making of consumers, of investors, of, untold enterprises."
'You could argue that we are on hold, we are in this wait and watch situation.'
The central bank for the 20 countries that use the euro is facing the same dilemma that has led the U.S. Federal Reserve to hold off on cutting rates further: it's hard to tell how high the tariffs will end up after fraught negotiations, and what the ultimate impact will be on the economy.
Fed Chair Jerome Powell has been harshly criticized by the Trump for delaying rate cuts. For his part, Powell has said the Fed wants to see the impact of the duties on prices and the economy before making any rate changes.
The ECB has already cut rates eight times since June of last year. The monetary authority for the 20 countries that use the euro currency has been lowering rates to support growth after raising them in 2022-2023 to snuff out inflation caused by Russia's invasion of Ukraine and the rebound after the pandemic.
With the bench mark rate now at 2%, down from a record high of 4% Analysts say a rate cut in September is a possibility but not a certainty. The reason: ECB's policymakers simply don't know the outcome of talks between the EU's executive commission and the Trump administration.
Trump first set a 20% tariff for EU goods, then threatened 50% after expressing displeasure at the pace of talks, then sent the EU a letter informing officials of a potential 30% tariff.
EU officials earlier held out hope of winning at least the 10% baseline that applies to almost all trade partners, and analysts think that the actual rate may be lower than Trump's tariff threats. The talks are up against an Aug. 1 deadline, but earlier deadlines have slipped as the sides kept talking.
Higher tariffs, or import taxes, on European goods would mean sellers would have to either increase prices for U.S. consumers - risking loss of market share - or swallow the added cost in terms of lower profits. In either case, higher tariffs would hurt export earnings for European firms and slow the economy, which would strengthen the case for another rate cut in September.
The ECB's rate cuts have helped support economic activity by lowering the cost of credit for consumers and businesses to purchase goods. Higher rates have the opposite effect and are used to cool of inflation by reducing demand for goods.
Growth in the eurozone was relatively strong at 0.6% in the first quarter - though that was partly due to rushed shipments of goods trying to beat the tariffs. Inflation has fallen from double digits in late 2022 to 2% in June, in line with the ECB's target. A stronger euro, which lowers the price of imports, and softer global prices for oil have helped keep inflation moderate.