The ECB will keep interest rates unchanged on Thursday but is still open to a possible cut

The ECB will keep interest rates unchanged this Thursday, according to Reuters, even as inflation across the 20-country euro zone slows to match the central bank’s 2% target.

But despite this hold, the possibility of further easing hasn’t been ruled out. Officials inside the ECB say they’re pausing, not stopping, while watching how things play out with U.S. trade policy, Germany’s fiscal push, and political chaos in France.

The bank had already cut its key rate in half this year, landing at 2% by June. Since then, it’s been in wait-and-see mode. Officials believe the economy is stable, not thriving, but not crashing either. Summer data gave no major surprises, just more time for policymakers to figure out what’s coming next.

They’re especially watching Donald Trump’s 15% tariffs on European goods, a spending spree from the German government, and rising bond yields in France triggered by political uncertainty.

Lagarde dodges details as last rate cut remains in play

ECB president Christine Lagarde is not expected to offer clarity about future interest rate decisions during her press conference on later today.

Her approach in July was to be, as she put it, “deliberately uninformative,” batting away every question about the direction of monetary policy. This time looks no different, because inflation is likely to fall below the 2% target next year, a development that keeps the idea of a final “insurance” cut on the table.

Analysts at HSBC wrote, “The risk of a more persistent inflation undershooting, which might become evident in December, when the ECB will be forecasting out to 2028, suggests a dovish bias.”

But it’s not a big debate. Policymakers are only discussing the possibility of one more cut. Most agree the major rate moves are done. The conversation now is about whether that last trim is needed, and when.

Traders are split, with a 50-60% chance of that final rate drop by spring. In contrast, the U.S. Federal Reserve, under Trump’s leadership, is widely expected to lower rates six times before the end of next year. The ECB will announce its rate decision earlier in the day, at 1215 GMT.

Council split as trade tension and France raise risks

Inside the Governing Council, views on what to do next aren’t aligned. The hawks, the group that wants no more easing, argue that the euro zone has handled global headwinds better than expected.

They point to stronger industrial activity, higher German government spending, and steady consumer demand as proof that the economy is holding up. Even with Trump’s tariffs landing harder than forecasted, companies across the bloc have adjusted. A deal has been agreed, and that’s helped lower some of the uncertainty.

BNP Paribas said in a research note, “Our base case remains for the economy to remain resilient, as trade-induced uncertainty recedes and gives way to a more positive impulse from higher European defence and German infrastructure spending.”

But that’s just one side of the fight.

The doves, those pushing for another rate cut, say the tariffs haven’t fully filtered through the system yet, worried about what happens if growth slows and prices weaken right as inflation dips below target.

That could push firms to lock in lower prices and wages, which risks dragging the euro zone back into the kind of weak inflation environment seen before COVID-19. If people and businesses start believing prices will stay flat, that belief becomes hard to undo.

Another complication is the Fed’s expected rate cuts could lift the euro’s value, making imported goods cheaper and dragging inflation down further.

Then there’s France. A fresh political mess in Paris has pushed French bond yields sharply higher. That puts extra pressure on the ECB, especially since France’s economy is already weighed down by high public debt and weak growth.

While the bank does have tools to respond, they can only be used when borrowing costs rise in a way that’s “unwarranted and disorderly.” Right now, economists say that’s not the case. The problems in France are real, and that means the ECB has no easy excuse to intervene, at least not yet.

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