The European Central Bank presses the "pause button" on interest rate cuts, and the market's focus shifts to "how long can it pause?"

The European Central Bank is set to pause its interest rate cuts at the July meeting, a decision that has been fully anticipated, but the market's real focus has shifted to whether this will be a short pause or a more lasting policy change. Deutsche Bank noted in its research report on July 18 that ECB President Christine Lagarde previously stated that the policy stance is in a "good position," setting the tone for this pause. The ECB will announce its interest rate decision on Thursday (July 24), followed by a press conference with Lagarde half an hour later. The bank pointed out that since June, the risks surrounding the ECB's terminal rate have expanded. Whether further rate cuts will occur and when they will happen will depend on whether the expected decline in inflation deepens and extends. This is mainly influenced by two key issues: the net impact of U.S. trade policy and European fiscal easing on inflation, whether it is positive or negative, and whether the appreciation of the euro has a deflationary effect. Deutsche Bank analysts also believe that the ECB has no motivation to change its explicit or implicit policy signals at the July meeting, keeping all options open and maintaining the current zero guidance, gradual meetings, and data-dependent policy approach, which aligns with the ECB's new "flexible" monetary policy strategy. This approach allows the central bank to flexibly adjust its policy stance based on changes in economic data, avoiding premature locking in of future policy paths. In the current economic environment, this strategy provides the central bank with greater policy space. Inflation Outlook Faces Multiple Uncertainties Deutsche Bank believes that the interaction of factors such as U.S. tariffs, European fiscal policy, and the euro exchange rate will determine the extent and duration of inflation deviating from the target, thereby affecting the ECB's policy decisions. The bank stated that strong external exchange rate appreciation, significant trade diversion effects, or worse-than-expected U.S.-Europe trade agreements could deepen inflation shortfalls and prompt further easing by the ECB. In its ECB preview report, Deutsche Bank presented three scenarios for the terminal rate. The first scenario is that the ECB stops cutting rates at 2.00%, the second is a risk management scenario that drops to 1.75%, and the third is the bank's ongoing baseline expectation of 1.50%. The bank believes that risks are accumulating against its long-held baseline expectation of 1.50%. The risk that the ECB's easing cycle stops at 1.75% or even 2.00% cannot be ignored, reflecting policymakers' cautious attitude towards inflation and economic prospects. Deutsche Bank stated that macroeconomic uncertainty is high, and monetary policy may follow multiple paths, making it impossible to guarantee that the terminal rate will reach a certain level by 2025. This uncertainty complicates the market's judgment on the duration of the pause. Economic Resilience Supports Policy Flexibility Despite facing tariff shocks and uncertainties, the Eurozone economy has shown significant resilience, providing the ECB with flexibility to assess the impact of U.S. tariff shocks, allowing for a gradual approach to policy rate reductions. Deutsche Bank's analysis shows that this resilience is partly attributed to the effective transmission of the ECB's accommodative policies to the real economy. The robustness of bank lending has pushed credit shocks to recent cyclical highs, which in turn supports private domestic demand and consumption in the Eurozone The upcoming bank loan survey and the monthly bank lending data for June will provide the latest insights supporting this. Typically, the European Central Bank's bank lending survey serves as a leading indicator for its monthly credit shocks. The last round of the bank lending survey suggested that lending might slow down in the second quarter, but this slowdown may have been postponed due to the continued delays and extensions of U.S. tariffs