Trump to impose 100% tariff on China starting November 1
Not leaving the good place, yet. The European Central Bank just decided to keep interest rates on hold
No Change on Macro Assessment
Never disappoint market expectations. This might have been one of the ECB’s considerations in keeping interest rates on hold today. But not the only one. The ECB majority appears to be emphasising several encouraging summer developments that support a wait-and-see approach: the ’it-could-have-been-worse’ trade deal between the US and EU, solid second quarter GDP growth, improving business sentiment indicators, and a modest uptick in August inflation.
The more benign take on downside risks to the economy was also confirmed in the ECB’s latest macroeconomic forecasts. The Bank’s staff currently expects GDP growth to come in at 1.2% in 2025, 1.0% in 2026 and 1.3% in 2027. Regarding inflation, the ECB has not changed its view, with inflation coming in at 2.1% in 2025, 1.7% in 2026, and 1.9% in 2027.
Door to One More Rate Cut Still Open
We have stressed before that the bar for yet another rate cut from the ECB remains high. Still, there are some valid dovish arguments that could still force the central bank to cut further over the coming months. Just think of the following: a growing awareness among eurozone policymakers in general that the trade framework agreement between the US and the EU is anything but set in stone.
The built-in conditionality on many aspects has left sufficient room for new escalations. But also think of the stronger euro exchange rate and a core inflation forecast of below 2% for 2026 and 2027.
All in all, we are now looking forward to the press conference and particularly what ECB President Christine Lagarde has to say about France and the possible use of the Transmission Protection Instrument (TPI). Lagarde needs to avoid repeating her 2020 mistake of casting doubt on her ’whatever it takes’ resolve, while still making clear that ECB support cannot be taken for granted. In fact,
Lagarde will have to stress that the TPI can only be activated for countries that actually comply with European fiscal rules or are at least following the given adjustment paths – a condition France currently does not fulfil. As regards the monetary policy outlook, today’s policy announcement shows that the door to yet another rate cut is still open.
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