At the end of July, the ECB concluded its cycle of interest rate cuts, leaving the base rate unchanged at 2%. Citadele Bank believes that the ECB will again decide not to change interest rates at its September meeting.
Such a decision would be logical, primarily given that the current interest rate has already reached the so-called neutral point. It means that interest rates are low enough to stimulate demand for loans, but high enough not to provoke inflation. The ECB, like other central banks, tends to be inert – once a neutral level is reached, it often chooses to monitor the situation rather than rush to change policy.
The second reason why the ECB may not change its base rates is the latest economic data, which does not show a significant impact of tariffs on the Eurozone economy or the need for additional measures. Although US tariffs on EU imports took effect in August, business surveys indicate that, after a couple of years of decline, German industry is showing signs of growth.
This suggests that the impact of tariffs on the Eurozone economy is not strong enough to require urgent action by the ECB. The Central Bank may therefore wait a few months to assess how these developments will affect the business environment in the coming months.
Third, inflation indicators also do not suggest further interest rate cuts. In August, annual inflation in the euro area accelerated to 2.1%, while inflation in the services sector remained high at 3.1%. These indicators show that inflation is not yet entirely under control, so lowering interest rates at this point could even be harmful.
The ECB's communication also indicates a cautious approach. Recent statements by Governing Council members have been more pointed, with some even warning of the potential risks associated with US tariffs. This suggests that the ECB will maintain a conservative stance in September and leave interest rates unchanged.
Among other things, market expectations currently confirm the stability scenario. The latest Chatham Financial forecasts indicate that the 3-month EURIBOR may drop to 1.9%, but this is likely to be its lowest point. Market participants do not expect a significant decline in interest rates, which once again confirms that the ECB's decision in September will likely be to maintain the current interest rate level.
It is therefore clear that the ECB is likely to decide against changing the base rate in September. It means that residents and businesses will be able to plan their financial commitments without any sudden shocks.
However, another interest rate cut could occur at the end of the year. It will depend on whether economic data shows an apparent weakening of the Eurozone economy and a slowdown in inflation.