ECB Keeps Rates Unchanged As Economy Holds Up Despite Trade Strife

The European Central Bank kept interest rates unchanged at 2% for the third meeting in a row on Thursday and offered no hints about future moves as it enjoys a rare period of low inflation and steady growth, even in the face of trade turbulence.

The central bank for the 20 countries that share the euro cut rates by a combined two percentage points in the year to June but has been on the sidelines since. It has made clear it is in no hurry to change policy given inflation is at target, a sweet spot not achieved by the US Federal Reserve, the Bank of England or the Bank of Japan.

Keeping all options on the table, the ECB repeated its longstanding guidance that future decisions would be guided by incoming data and it would not pre-commit to any particular policy path.

ECB still in a 'good place'

"The Governing Council's assessment of the inflation outlook is broadly unchanged," the ECB said in a statement. "The robust labour market, solid private sector balance sheets and the Governing Council's past interest rate cuts remain important sources of resilience."

Speaking at a 1345 GMT news conference, ECB president Christine Lagarde is also expected to repeat that policy is in a "good place" and that policymakers can live with small, temporary deviations from the inflation target.

Lagarde is unlikely to shut the door to further policy easing, however, as ever-shifting US tariffs have yet to fully work their way through the economy, keeping uncertainty elevated and raising the risk that growth and inflation fall too low.

"The outlook is still uncertain, owing particularly to ongoing global trade disputes and geopolitical tensions," the ECB added. "The Governing Council is not pre-committing to a particular rate path."

While some policymakers have repeatedly warned about downside risks, some key data have surprised on the upside in recent weeks, pointing to a more balanced outlook.

Growth is holding up

Eurozone gross domestic product grew by 0.2% on the quarter, beating the ECB's prediction it would stagnate and a 0.1% growth forecast by economists, as Spain and France both outperformed.

Some early fourth-quarter figures may even point to a pick-up in growth.

Business activity, as measured by a Purchasing Managers' Index survey, is accelerating, while sentiment in Germany, the bloc's biggest economy, is improving and businesses are becoming more optimistic, partly because the fog over tariffs is starting to lift.

But these relatively upbeat reports are balanced out by more sombre data showing that industry continues to suffer and that exports to the United States are down sharply, as well as growing evidence that China is dumping goods it cannot sell in the US on European markets.

Can the tranquility last?

The real question then is whether the outlook can remain in such a fine balance given the continued tariff hit, Chinese trade diversion and weak exports.

The strong euro is also weighing on inflation, but the currency has steadied in recent weeks and a hawkish tone from Federal Reserve chair Jerome Powell after Wednesday's rate cut may limit further gains.

Undershooting risk would strengthen the case for a "slightly lower" policy rate, ECB chief economist Philip Lane argued recently, a message that is consistent with market pricing which now puts the chance of one last cut by next June at around 40% to 50%.

But the majority of economists see rates remaining where they are on the premise that uncertainty will fade, households have plenty of savings and Germany is raising spending sharply.

Inflation could still undershoot the ECB's target next year but it is then seen coming back up and policymakers have made it clear that they can tolerate temporary deviations.

The real test of this tolerance is only likely to come in December, when the bank presents fresh projections, including initial estimates for 2028.

Source: Theedgemarkets