People walk in to the headquarters of ECB in Frankfurt. — AFP
FRANKFURT: Investors preparing for the European Central Bank’s interest rate-setting meeting on Thursday should also focus on a plethora of economic reports this week to gauge where monetary policy is headed.
Still lacking clarity on trade, officials in Frankfurt will scour the releases for signs of how the 20-nation eurozone is holding up in the face of Donald Trump’s repeated tariff threats and other geopolitical turmoil.
The reports – from lending surveys to an early appraisal of business activity in July – aren’t likely to stop them from pausing rate reductions for the first time in a year.
But they will help determine whether more is needed, perhaps when policymakers next convene in September, or whether monetary loosening is over.
“It’s unlikely that data will tilt the balance toward a cut last minute,” said Jari Stehn, European chief economist at Goldman Sachs.
But “if there are signs of a weakening, it could strengthen the case for keeping the option of more easing open”.
After eight quarter-point moves that have brought the deposit rate to 2%, ECB president Christine Lagarde said last month that the cutting cycle is nearing its end.
Officials reckon they are well positioned to sit out the elevated uncertainty, with borrowing costs at neutral levels that neither restrict nor spur economic activity.
A key indicator of the influence rates are exerting will arrive today with the ECB’s quarterly Bank Lending Survey – the first since Trump unveiled his levies in April.
Worried about growing risks, banks previously reported tighter credit standards.
But ECB Executive Board member Isabel Schnabel has said the last poll revealed a stimulative effect as lower borrowing costs boosted demand for mortgages.
This round should show how tariffs and geopolitical uncertainty have impacted the transmission of ECB policy, according to Fabio Balboni, an economist at HSBC.
“Were we to see a meaningful improvement in credit conditions despite those negative external developments, this could strengthen Schnabel’s case that conditions are already accommodative.
“But we do not think this is yet the case,” he said.
According to senior euro-area economist David Powell, the ECB is in a wait-and-see mode.
“We think that will eventually lead to further easing in September and December.
“In the meantime, we expect the language after the meeting on July 24 to be similar to the wording in June, leaving open the possibility of additional cuts without committing to them.”
Comments since the last policy meeting have revealed varying degrees of concern on the Governing Council about the economy, which benefitted from front-loading of US orders at the start of the year but whose expansion has otherwise been lacklustre.
Bank of France governor Francois Villeroy de Galhau has warned of headwinds to growth and the risk of inflation undershooting 2% for a prolonged period – signalling openness for a further reduction in rates.
Silke Tober, a monetary-policy expert at Germany’s IMK economic research institute, said rate cuts so far aren’t sufficient to counter economic weakness – particularly in light of this year’s appreciation in the euro.
Other officials, however, highlight resilience among companies and households, with Schnabel calling the bar for another move “very high”.
The economy was indeed much stronger than anticipated in the first quarter (1Q25).
But as front-loading reverses, ECB vice president Luis de Guindos has cautioned that growth will be “almost flat” in the 2Q25 and 3Q25.
An initial reading for the three months through June is only due on July 30.
But Thursday’s monthly survey of purchasing managers by S&P Global and Germany’s Ifo business confidence indicator the following day will shed some light on the impact of Trump’s trade mess and whether the ECB’s base case from June is holding.
Assuming a relatively benign trade outcome – a far cry from the 30% levy that Trump recently threatened – those projections put inflation at just 1.6% in 2026, returning to target in 2027. Growth was seen accelerating to 1.3% in 2027.
A key question is whether higher public spending in Germany and other parts of Europe will offset tariff uncertainty and the firmer euro, which dents competitiveness and pulls inflation lower. — Bloomberg
