FRANKFURT, Germany (AP) — Inflation is back under control, and the European economy is weathering Trump’s tariff onslaught better than expected. Those are reasons the European Central Bank is expected to keep its benchmark interest rate unchanged Thursday.
Instead, attention will focus on what bank President Christine Lagarde will have to say about France’s fiscal crisis — 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.
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 51.1 in August, with readings over 50 indicating expansion.
The EU’s executive commission calmed the mood somewhat by negotiating a 1 5% 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.
As a result, the bank’s benchmark deposit rate is expected to remain at 2%. The 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’s no great pressure to move rates Thursday. Analysts think another cut is possible in coming months.
France’s fiscal trouble presents a challenge for Lagarde’s communication at her post-decision news conference. 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 will have to mince her words carefully this Thursday, neither suggesting that the ECB may eventually bail out an unrepentant fiscal sinner nor taking such a harsh line as to unsettle markets that still give France the benefit of the doubt,” said Holger Schmieding, chief economist at Berenberg bank.
