For the first time in a year! The European Central Bank may press the "pause button" on interest rate cuts tonight

The European Central Bank is expected to pause its year-long rate-cutting cycle, marking the first time in over a year. As the tariffs potentially imposed by the Trump administration cast a shadow over the inflation outlook, policymakers are inclined to hold off temporarily to await clearer information before deciding on the next steps. According to a recent media survey of economists, all respondents except for two expect the European Central Bank to keep the deposit rate unchanged at 2% during Thursday's meeting. This move means that the continuous easing cycle of 200 basis points that began in June 2024 will be temporarily halted. During this meeting, the subtle changes in the policy statement and the communication style of Lagarde will be the focus of the market. Investors may pay particular attention to how officials describe the decision to maintain interest rates. For example, using the term "pause" may fuel market expectations that the rate cuts are not over. Although a pause in rate cuts this month has become a general consensus, the market expects the next rate cut to occur in September. By then, the European Central Bank will have new economic forecast data, and the trade dispute with the United States may also have reached a preliminary conclusion. Additionally, the assessment of economic risks is crucial. Morgan Stanley's Chief European Economist Jens Eisenschmidt stated in a report that if risks are still viewed as skewed to the downside, this would be an "important communication tool suggesting a rate cut in September." Trump Tariffs Become the Biggest Variable The unresolved U.S. tariffs are the primary reason the European Central Bank is choosing to wait at this moment. According to CCTV News, U.S. President Trump stated on the 12th that a 30% tariff will be imposed on goods imported from the EU starting August 1. This uncertainty poses significant risks to the European economic outlook. Media reports indicate that negotiations are still ongoing, but the outcomes are less favorable than the risks predicted by the European Central Bank in June. Notably, even in the European Central Bank's previous "severe scenario" stress tests, only a 20% tariff on all European goods was assumed. The worse the final tariff outcome, the greater the impact on the European economy, and inflation may be further depressed. European Central Bank Vice President Luis de Guindos warned that, as a result, output in the eurozone could stagnate in the second and third quarters. What’s Next? Internal Disagreements While officials are in unanimous agreement on pausing rate cuts this month, they have yet to reach a consensus on how to proceed next. Some officials are open to further easing measures, as they are concerned that inflation may stagnate below the 2% target. The Governor of the Bank of France, Francois Villeroy de Galhau, and the Governor of the Bank of Italy, Fabio Panetta, have both hinted that more easing measures may be necessary; in fact, the European Central Bank's June forecast already assumed another rate cut However, some officials are more cautious. Executive Board member Isabel Schnabel believes that the threshold for further interest rate cuts is "very high." They warn that increased public spending in the coming years could stimulate prices. Paul Hollingsworth, Chief European Economist at BNP Paribas, points out that there are differences in how officials respond in a highly uncertain environment: "Some prefer the central bank to be relatively passive and act cautiously; others advocate for a more flexible and agile response." Euro Strength Sparks Internal Concerns Despite facing tariff threats, the Eurozone economy is not without its highlights. The PMI output index rose to its highest level in nearly a year in July. Additionally, planned increases in military and infrastructure spending over the next few years, along with over 60 top German companies announcing new projects worth more than €100 billion, have injected optimism into the market. At the same time, the strength of the euro will also be closely monitored. The euro's 13% rise against the dollar this year has raised concerns among some policymakers, as it makes export goods more expensive and lowers import costs. As of the time of writing, the euro/dollar is down 0.12% to $1.175. Luis de Guindos stated in a media interview in July that a euro/dollar exchange rate above 1.20 would make the situation "much more complicated." Latvia's Martins Kazaks also mentioned that a further significant appreciation of the euro could "upset the balance," prompting the central bank to cut rates again. However, not everyone shares this view; Isabel Schnabel believes such concerns are "exaggerated," and there are opinions that while calling for an enhanced global status of the euro, it is difficult to complain about its strength