ECB interest rate pause preserves monetary policy flexibility

“The European Central Bank's upcoming decision on September 11 is unlikely to hold any surprises. After a total of eight interest rate cuts since mid-2024, there is much to suggest that the ECB will continue to follow its “wait-and-watch” approach from July 2025 and leave its policy interest rate unchanged at 2 percent. The latest inflation data for the eurozone, at 2.1 percent in August, is slightly above the target, while core inflation is stagnating at 2.3 percent. This means that inflation remains moderate and close to the inflation target.

Several members of the ECB Governing Council have recently emphasized that the current interest rate level is already having a slightly expansionary effect on the economy. Given robust domestic demand and stable labor markets overall, a further interest rate cut does not appear to be necessary at present. At the same time, uncertainty remains about the future development of inflation, as trade tensions or a stagnating economy in the eurozone could either increase or decrease inflation.

This suggests that interest rates will remain unchanged in the coming months. With this decision, the ECB is retaining the necessary flexibility to respond to future developments in either direction. If inflation accelerates unexpectedly or the economic recovery proves stronger than expected, an interest rate hike from 2026 onwards would be conceivable. However, in the event of new economic headwinds, further easing of monetary policy would also be possible.

Another factor of uncertainty is the Trump administration's attempts to undermine the Fed's independence. If these attempts were successful and inflation in the US rose significantly as a result, this could have far-reaching consequences for international financial markets and the dollar exchange rate, and thus also for the ECB's monetary policy. This is another important reason for the ECB to maintain the greatest possible monetary policy leeway at present."