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Investing.com - The European Central Bank is expected to wait until September to cut its key policy rate again as officials eye ongoing trade uncertainty and the recent appreciation of the euro, according to analysts at Capital Economics.
In June, the ECB slashed borrowing costs for the eighth time in a year, bringing its key deposit rate down by 25 basis points to 2.0%, although policymakers did not provide outright guidance for changes later this year.
In a statement, the ECB said its latest decision to lower rates came as the euro area economy faces waning inflation but persistent uncertainty around the impact of global trade tensions.
The cut was widely anticipated by markets, meaning that much of the debate among analysts heading into the announcement swirled around the central bank’s plans for rates over the rest of the year.
Given an easing in inflation back down to the ECB’s 2% target, some investors have bet that policymakers will push pause on the rate-reduction cycle in July and potentially roll out one more drawdown before the end of 2025.
But, writing in a note to clients, the Capital Economics analysts led by Franziska Palmas argued that the ECB is "much more likely to wait until September to ease policy further."
The comment comes as murkiness surrounds U.S. President Donald Trump’s tariff plans, with a pause to his sweeping "reciprocal" tariffs is due to expire on on July 9.
The White House has previously targeted the European Union -- which includes several euro zone countries -- with these levies, hitting out at the bloc for perceived unfair trade practices.
European trade officials met with their Trump administration counterparts in Washington this week. But a trade agreement has yet to be reached, with the EU pushing for a deal "in principle" that would include immediate tariff relief for key sectors.
Media reports have suggested that a pact could see the European Commission -- the chief trade negotiator for the EU -- accept a baseline 10% U.S. tariff in exchange for reduced duties on those industries. Yet some in Brussels are calling on the EU to take a stronger stance and insist on a reduction to the 10% levy rate.
The ECB warned that the uncertainty may weigh on business investment and exports in the short term, although medium-term growth is tipped to be bolstered by increased government spending on defense and infrastructure.
"We think the most likely outcomes are an extension of talks or a quite vague preliminary deal," the Capital Economics analysts predicted.
Along with the ongoing trade negotiations, some ECB insiders have also become more concerned over a steep jump in the euro against the U.S. dollar this year, according to the Financial Times.
Bolstered by a shift by investors into European assets earlier this year during a time of increased U.S. policy uncertainty, the euro has surged by almost 14% so far this year.
The ECB may need to signal that too much strengthening in the euro could be issue, as it might lead inflation to hover below targets, the paper reported, quoting a senior European central banker. A stronger euro can pull down price gains and make imports cheaper, but also dent make exported products more expensive abroad and weigh on overall economic activity.
Coupled with signs of tepid growth in the eurozone, along with possible headwinds from U.S. tariffs, some central bankers have become uneasy, the FT reported.
Earlier this week, ECB Vice President Luis de Guindos told Bloomberg TV that this type of "overshooting" of the euro should be avoided. Although the euro exchanging hands at roughly $1.18 may be acceptable, it would be "complicated" for policymakers to wave off levels above $1.20, de Guindos warned.