BRUSSELS - The European Central Bank looks set to keep interest rates unchanged on Thursday while the introduction of higher US tariffs threatened by US President Donald Trump hangs in the balance.
A pause would bring an end to a string of cuts that dates back to September last year, as the ECB progressively lowered borrowing costs in response to sinking inflation.
The pace of consumer price rises has settled around the central bank's two-percent target, having soared to double digit highs in the wake of the coronavirus pandemic and Russia's full scale invasion of Ukraine.
But the relatively more favourable monetary policy conditions look fragile with an August 1 deadline for the possible imposition of punitive tariffs on European exports into the United States set by Trump.
With Washington and Brussels still in talks over a possible tariff deal, ECB rate-setters would want "more clarity... before considering any further adjustment to monetary policy", UniCredit analysts said.
A pause would give policymakers the summer to see whether Trump follows through with his threat to slap EU exports with a flat 30-percent tariff, in addition to existing levies on cars, steel and aluminium.
Higher barriers to trade risk delivering a fresh blow to the eurozone economy, and encourage the ECB to contemplate further rate cuts.
After seven straight cuts and eight in total since June last year, the ECB has brought its benchmark deposit rate down to two percent from its peak of four percent in the midst of the inflation wave.
"Neither the economic data nor latest data regarding price dynamics demand an immediate response from the ECB," according to Dirk Schumacher, chief economist at German public lender KfW.
The ECB would also want to "keep some powder dry for the case of emergency" if Trump were to apply harsh tariffs, Berenberg analyst Felix Schmidt said.
"A further escalation in the trade dispute would have a significant negative impact on the eurozone economy," leading to more rate cuts, Schmidt said.