FRANKFURT, Germany (AP) — The European Central Bank left interest rates unchanged Thursday with inflation back under control and the economy weathering Trump’s tariff onslaught better than expected.
The bank’s rate-setting council left its benchmark deposit rate unchanged at 2% at a meeting at its skyscraper headquarters in Frankfurt.
The focus in Europe has shifted to the fiscal crisis in France and any possible role for the ECB in containing potential market turmoil that could erupt from the country’s out-of-control deficit and political logjam.
Bank President Christine Lagarde said after the rate decision that monetary policy was “in a good place” and that decisions are being made “meeting by meeting," She gave no hint of future moves, saying the bank is “not on a predetermined path."
The ECB is standing pat on interest rates even as the US Federal Reserve has held the door open for a possible cut at its Sept. 17 meeting.
The 20 countries that use the euro currency — and where the ECB sets rate policy — showed 0.1% growth in the second quarter over the quarter before, not great but not sliding into outright recession either despite the disruption from U.S. President Donald Trump’s new and higher tariffs. The S&P Global survey of purchasing managers, a key indicator of economic activity, came in at 51 in August, with readings over 50 indicating expansion.
The EU’s executive commission calmed the mood somewhat by negotiating a 15% ceiling on US tariffs, or import taxes, on European goods brought into the US. While that’s far higher than pre-Trump tariff levels, Trump had threatened even higher rates and the deal gives some certainty that trade will continue, albeit with higher costs.
"Trade uncertainty has clearly diminished,” Lagarde said.
The ECB’s deposit rate influences borrowing costs throughout the economy. The ECB raised rates sharply to combat a burst of inflation in 2021-23, and has since lowered them as inflation came back under control and concerns grew about growth. Higher rates fight inflation but can slow growth, while lower rates can stimulate economic activity by making borrowing cheaper for purchases.
Eurozone inflation was 2.1% in August, roughly in line with the bank’s target of 2%. With growth holding up, that means there was no great pressure to move rates Thursday. Analysts think another cut is possible in coming months.
Lagarde was asked several times about the French government's fiscal crisis. The French government’s bond-market borrowing costs have risen somewhat due to the inability of a divided parliament to tackle the large deficit, which was 5.8% of GDP last year. In case of a full-blown market panic that sends rates higher, the ECB could intervene to purchase French bonds and drive down borrowing costs. But that’s only possible for countries that are obeying the EU’s rules on limiting debt or are moving to comply, which France at this point is not.
Lagarde said the ECB's emergency bond market backstop, dubbed the transmission protection instrument, was not discussed at the meeting and that the broader European bond market was functioning normally.
“I’m not commenting on any particular country, but suffice to say that we always monitor market developments and euro area sovereign bonds are orderly and are functioning smoothly with good liquidity,” she said.
Analysts say the challenge for Lagarde is to avoid suggesting the ECB would bail out politicians who won’t manage the government’s finances properly, while not taking such a hard line that she unsettles bond markets.