ECB leaves interest rates unchanged as the eurozone economy resists U.S. tariffs
TOI World Desk | TOI Global Desk | Sep 11, 2025, 21:26 IST
The European Central Bank held interest rates steady at 2 percent on Thursday, citing stable inflation and modest growth in the eurozone despite U.S. tariffs. ECB President Christine Lagarde said policy will be decided “meeting by meeting.” Inflation stood at 2.1 percent in August, aligning with the bank’s target. While trade tensions eased after a tariff cap agreement with Washington, France’s widening deficit and political gridlock have raised concerns over potential market instability.
The European Central Bank (ECB) retained interest rates unchanged on Thursday, underpinned by confidence that the eurozone will ride out American tariffs and steady inflation, as attention shifted to France's worsening budget crisis.
The governing council of the ECB kept the benchmark deposit rate unchanged at 2 percent during its headquarters meeting in Frankfurt. President Christine Lagarde said decisions will continue to be made “meeting by meeting,” emphasizing that the bank is “not on a predetermined path.”
The decision came as the 20 eurozone nations recorded modest growth of 0.1 percent in the second quarter compared with the previous quarter. The S&P Global Purchasing Managers’ Index measured 51.1 in August, indicating continued expansion despite U.S. President Donald Trump’s new tariffs.
European leaders recently negotiated a cap of 15 percent on U.S. tariffs for European exports, easing fears of a trade escalation. While the rate is higher than pre-tariff levels, it is lower than what Trump had previously threatened. “Trade uncertainty has clearly diminished,” Lagarde said.
Inflation in the euro area was 2.1 percent in August, near the 2 percent target of the ECB. With price increases under management and economic output steady, there is little sense of urgency for rate cuts now, though future changes cannot be ruled out.
The ECB has actually increased rates sharply during 2021–23 to combat runaway inflation but subsequently cut them as economic worry turned toward growth.Higher rates tend to restrain inflation by raising the cost of borrowing, while reduced rates stimulate activity by lowering the cost of borrowing.
Meanwhile, concern is growing about France's deficit, which reached 5.8 percent of GDP last year. Borrowing costs for the bond markets have been increasing with the political stalemate in Paris. According to the analysts, although the ECB may step in by buying French bonds in case of market instability, it is doing so only for countries that meet the European Union debt rules — something France is not at present.
Lagarde will have to reassure markets without precipitating a bailout of governments that refuse to curb their deficits. The thin line, analysts say, will prove to be key to investor confidence in the months to come.
The governing council of the ECB kept the benchmark deposit rate unchanged at 2 percent during its headquarters meeting in Frankfurt. President Christine Lagarde said decisions will continue to be made “meeting by meeting,” emphasizing that the bank is “not on a predetermined path.”
The decision came as the 20 eurozone nations recorded modest growth of 0.1 percent in the second quarter compared with the previous quarter. The S&P Global Purchasing Managers’ Index measured 51.1 in August, indicating continued expansion despite U.S. President Donald Trump’s new tariffs.
European leaders recently negotiated a cap of 15 percent on U.S. tariffs for European exports, easing fears of a trade escalation. While the rate is higher than pre-tariff levels, it is lower than what Trump had previously threatened. “Trade uncertainty has clearly diminished,” Lagarde said.
Inflation in the euro area was 2.1 percent in August, near the 2 percent target of the ECB. With price increases under management and economic output steady, there is little sense of urgency for rate cuts now, though future changes cannot be ruled out.
The ECB has actually increased rates sharply during 2021–23 to combat runaway inflation but subsequently cut them as economic worry turned toward growth.Higher rates tend to restrain inflation by raising the cost of borrowing, while reduced rates stimulate activity by lowering the cost of borrowing.
Meanwhile, concern is growing about France's deficit, which reached 5.8 percent of GDP last year. Borrowing costs for the bond markets have been increasing with the political stalemate in Paris. According to the analysts, although the ECB may step in by buying French bonds in case of market instability, it is doing so only for countries that meet the European Union debt rules — something France is not at present.
Lagarde will have to reassure markets without precipitating a bailout of governments that refuse to curb their deficits. The thin line, analysts say, will prove to be key to investor confidence in the months to come.