MNI SOURCES: ECB Eyes July Pause, Tariffs Key To Cut Timing

The European Central Bank is likely to pause its easing cycle in July, with policymakers pointing to the expiration of the reprieve on U.S. tariffs on July 9 as pivotal for determining their next moves in 2025, though one more 25-basis-point cut in either September or December is the base-case scenario, Eurosystem sources told MNI.

After lowering the deposit rate to 2% on Thursday, ECB eyes officials are focused on U.S.-EU trade negotiations with several sources backing a pause at the July 24 Governing Council meeting in order to allow time to digest events. (See MNI ECB WATCH: ECB Cuts 25BP, Nears End Of Cycle)

While President Christine Lagarde told the post-meeting press conference that the ECB was not worried by its projection for inflation to decline to 1.6% in  2026, one source saw another cut in September if the June outlook was confirmed. Another official pointed out that 2027’s projection for inflation of 2% was based on the market's expectation of at least one more cut.

“The assumption on another cut is built into current projections, which suggest constant rates at 2% would probably have inflation even lower below target in 2026 and core perhaps as low as 1.8% in 2027,” the second source said. (See MNI INTERVIEW: Risk Rising Of Sub-2% ECB Rates-Malta's Demarco)

TRADE SCEPTICISM

In the event of a successful negotiation in July that puts an end to trade tensions –something about which officials are sceptical—the ECB could also pause in September and maybe cut later in the year in October or December, depending on how things evolve, the source said. “Remember last year we shifted away from the perception of a quarterly flight path in October,” he added.

The prospect of an additional cut hinges on whether risks to growth and inflation from potential trade tensions — including retaliation scenarios not included in the baseline — materialise after the July deadline, sources said

“But it is near-on impossible to try and be precise over timing on any future policy moves given the uncertainty over the July 9 tariff deadline,” another source said, adding that from a macro perspective it does not matter whether the cut occurs in July or September. “It’s a Q3 cut, assuming we cut,” he added.

An ECB spokesperson declined to comment.