MUFG: It is expected that the European Central Bank will pause interest rate cuts this week, with only 25 basis points of easing space remaining for the year

According to Zhitong Finance APP, Mitsubishi UFJ Financial Group (MUFG) expects that the European Central Bank will officially press the pause button on consecutive rate cuts this week, keeping the deposit facility rate at 2%—exactly at the midpoint of its defined "neutral" range of 1.75%–2.25% at the beginning of the year.

The bank stated that inflation has firmly returned to the 2% target, and although oil prices are slightly higher than the last forecast, the strong euro is sufficient to offset its upward effect, thus the judgment that the policy is "in a good position" still holds.

Officials are satisfied with the current market pricing—an additional rate cut of about 25 basis points within the year—and the meeting will continue to use the guidance of "data-dependent, meeting-by-meeting assessment, no pre-set path," deliberately avoiding any remarks that could shake market expectations to maintain maximum flexibility.

As the August 1 deadline approaches, the space for reaching an agreement remains narrow, and the risk of deterioration is high. If the final trade outcome is relatively mild (i.e., the U.S. tariff rate is set at 10%), Mitsubishi UFJ Financial Group may correspondingly lower its expectations for further rate cuts.

If negotiations break down and tariffs escalate further, the rationale for easing will be even more compelling, potentially lowering rates to a slightly accommodative range of 1.5%.

There is still room for further easing

Regardless of the outcome of the trade negotiations, MUFG still believes there is room for a further modest rate cut. Between now and the next meeting in September, a series of key data will be released, including the second-quarter GDP (expected to slow significantly) and unit labor costs (expected to show a slowdown in wage growth).

In this context, if the inflation data for July and August falls below expectations again, it will be more difficult for policymakers to argue that disinflation is solely a story of energy and exchange rates.

Meanwhile, Germany's large-scale fiscal stimulus is about to be implemented, while France, the second-largest economy in the eurozone, is presenting a tightening trend in its 2026 budget proposal, and the divergence in fiscal strength within the region will also affect the space and pace of monetary policy