So there were no surprises at the ECB's July meeting. They kept interest rates unchanged at 2% and that was very much what we were expecting as well as market consensus going into the meeting.
That said, I think that the market reaction has been that the tone of the meeting was a bit more hawkish than had been expected and there were really two reasons for that. One, with regards to President Lagarde comments on the euro exchange rate and secondly, around tariff uncertainty.
So on the exchange rate, I think what the market was looking for potentially is some sense that the ECB Council, governing Council is quite concerned about the fact that the euro has appreciated so much and that this could act as a depressive effect on the inflation outlook. But we really didn't get that sense from President Lagarde.
And secondly, as of, you know, the time of the July ECB policy meeting, we don't really know yet what is going to be the eventual USEU trade agreement. But, all indications suggest that tariffs are probably going to be that little bit higher than what consensus had been expecting of, say, around 10%, but maybe it's looking like more like 15%. And so, normally higher tariffs, weaker demand impact on the euro area would suggest other things equal that the ECB needs to cut.
However, President Lagarde emphasized that any deal that does get agreed, potentially in the coming days, would actually remove a lot of uncertainty that hitherto has been holding back investment and that could actually be good for growth near term.
So a bit more of an optimistic tone coming from the ECB Governing Council and President Lagarde at the press conference around the prospect of lower uncertainty helping growth and not too concerned about weaker currency weighing on the inflation outlook. So both of those things bit more hawkish than market had been expecting.
And so we are seeing market pricing converging towards our call, which we've had really for some time now, which is that having cut rates to 2%, we expect the ECB to stay at 2% for the remainder of this year and then cut one more time in the first half of 2026. And we are not changing our call following the July meeting.
Happy summer.
