ECB Keeps Rates on Hold. Why It Joined the Fed and Powell on Pause.

Christine Lagarde, president of the European Central Bank, will hold a press conference Thursday. (Getty Images)

The European Central Bank has been running ahead of the Federal Reserve on interest-rate cuts. Now it’s taking a break to catch its breath.

The central bank for the 20 nations sharing the euro is keeping its main rate unchanged Thursday, as was widely expected. Back in June, it lowered the key deposit rate to 2%, which was the eighth consecutive quarter-point reduction. By contrast, the Fed has kept its key rate on hold since December, having cut by a percentage point in the second half of last year.

President Donald Trump has made it very clear that he’s been unhappy with Fed Chair Jerome Powell’s decision to hold rates in order to gauge how tariffs will affect inflation. Trump has cited the ECB and its recent rate-cutting on several occasions when criticizing Powell.

However, ECB President Christine Lagarde has signaled she’s also now in “wait and see” mode.

“Partly reflecting the Governing Council’s past interest rate cuts, the economy has so far proven resilient overall in a challenging global environment,” the ECB said in a statement. “At the same time, the environment remains exceptionally uncertain, especially because of trade disputes.”

Inflation in the euro area was 2% in June, in line with the ECB’s target but up from 1.9% in May. Economic growth picked up to 0.6% in the first quarter from 0.3% in the last three months of 2024.

“We are in a good position now to hold and to watch how events develop,” Lagarde said in a press conference. She reiterated that the bank is “not pre-committing to a particular rate path.”

Investors pared bets on the ECB delivering another quarter-point cut and now see about a 50% chance of such a move by the end of the year, according to LSEG data. Before the decision another reduction was fully priced in.

By contrast, the market shows odds of 58% that the Fed lowers its main rate by a quarter point on Sept. 17, according to the CME Fedwatch Tool. They see a 97% chance that the Fed stays on hold at the next decision on July 30.

Write to Brian Swint at brian.swint@barrons.com