The European Central Bank (ECB) held interest rates steady at 2% on Thursday, pausing its year-long policy easing cycle.

The decision came after a series of eight cuts — seven of them consecutive — since June last year as policymakers await clarity on Europe's future trade ties with the United States.

Why has the ECB stopped interest cuts?

While the European Central Bank has managed to bring down consumer prices that surged after the pandemic and Russia's 2022 invasion of Ukraine, officials now face a fresh challenge — rising US tariffs under President Donald Trump.

With inflation now back at the bank's 2% target and interest rates halved since June 2024, monetary policymakers also said there was no urgency to adjust further at present.

Bank officials said trade tensions made the economic environment particularly hard to predict.

"The environment remains exceptionally uncertain, especially because of trade disputes," the ECB said amid the ongoing tariff negotiations.

They offered no hints on when the next move might come.

Was the ECB's decision expected?

The announcement had been widely expected, particularly because inflation was on target for June. 

After the last policy meeting on June 5, ECB President Christine Lagarde said the central bank was "getting to the end of a monetary policy cycle."

With signs of economic activity looking reasonably healthy, the ECB can afford to wait until the outcome of transatlantic trade talks becomes clearer.

What happens next?

New tariffs on European goods entering the US could squeeze exporters by forcing them to raise prices for stateside consumers or absorb the added costs through lower profits.

Either outcome would reduce export earnings and weigh on Europe's economy, potentially strengthening the case for another rate cut in September.

"We are determined to ensure that inflation stabilizes at our 2% target in the medium term." Lagarde said after the latest announcement. "We will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance."

"The sooner this trade uncertainty is resolved... the less uncertainty we will have to deal with", Lagerde said, stressing that the ECB remained in a "wait and watch" position regarding future interest rate decisions.

She added that the inflation outlook was more uncertain than usual because of the volatile global trade policy environment.

"A stronger euro could bring inflation down further than expected," Lagarde said.

"Moreover, inflation could turn out to be lower if higher tariffs lead to lower demand for euro area exports and induce countries with overcapacity to reroute their exports to the euro area."

The euro has gained 13% on the dollar this year, reaching $1.17, raising concerns about its potential drag on growth. ECB Vice President Luis de Guindos warned that any sharp move above $1.20 could become "much more complicated."

ING bank analyst Carsten Brzeski said July's otherwise quiet policy meeting may see closer scrutiny of the euro’s strength. While currency worries may not appear in official statements, Brzeski noted they could tilt the ECB toward a more dovish stance.

Edited by: Wesley Dockery