Trade war uncertainty prompts halt to eurozone rate cuts
The European Central Bank (ECB) has kept its core interest rates on hold after seven successive cuts, citing uncertainty over the threatened US trade war escalation.
The governing council has acted eight times in 12 months to bring down borrowing costs for the 20 European Union member states which use the euro.
The Bank first acted in a bid to help stoke economic growth as Russia-Ukraine war-linked inflation started to ease, with the pace of price growth across the eurozone now back at the ECB’s target of 2%.
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It is expected to remain stable but that would be jeopardised in the event of a damaging tit-for-tat escalation in Donald Trump’s trade war.
EU diplomats expressed optimism on Wednesday evening that a deal to avert the worst of the 30% baseline rate, threatened by the president against EU goods shipped to America, was close.
A failure to secure a truce by 1 August would see that higher rate kick in. But it was hoped that talks would settle on a 15% sum – with some exemptions also possible.
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The ECB’s estimates show that higher US tariffs would result in lower growth and, depending on the extent of EU retaliation, inflation in the euro zone over the medium term.
Its baseline projection from June, which incorporates 10% US tariffs, saw price growth below 2% over the next 18 months, aided by a stronger euro and weaker oil prices.
But the European Commission is readying several packages of measures, worth a combined €93bn (£81bn) that could be deployed in the event of a truce failing to be agreed. The first tranche is slated to take effect on 7 August.
In addition to targeting imports of US goods, the countermeasures could even be extended to services.
Any retaliation would likely fan the flames of inflation in the euro area as the higher cost of many US products would likely be passed on down supply chains to consumers.
More rate cuts ahead?
Given the current uncertainty, the ECB said it in its statement that it would decide policy “meeting by meeting… based on its assessment of the inflation outlook and the risks surrounding it”.
Money markets were still pricing in a further interest rate reduction, probably by March, as inflation was seen at risk of going too low.
Even the ECB’s baseline projection from June, which incorporates 10% tariffs from the United States, saw price growth below 2% over the next 18 months.
Financial markets and economists are currently split on the prospects for further rate reductions.
The main deposit rate stands at 2% – down from 4% a year earlier.
Retail sales grew in June as warm weather boosted spending and day trips, official figures show.
Spending on goods such as food, clothes and household items rose 0.9%, the Office for National Statistics (ONS) said.
It’s a bounce back from the 2.8% dip in May, but last month’s figure was below economists’ forecast 1.2% uplift as consumers dealt with higher prices from increased inflation.
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Also weighing on spending was reduced consumer confidence amid talk of higher taxes, according to a closely watched indicator from market research firm GfK.
Retail sales figures are significant as they measure household consumption, the largest expenditure in the UK economy.
Growing retail sales can mean economic growth, which the government has repeatedly said is its top priority.
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June’s retail sales rise came as people bought more in supermarkets, and retailers said drinks sales were up.
While hot and sunny weather boosted some brick-and-mortar shops, the heat led some to head online.
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Trade war uncertainty prompts halt to eurozone rate cuts
Non-store retailers, which include mainly online shops, but also market stalls, had sold the most in more than three years.
Not since February 2022 had sales been so high as the Met Office said England had its warmest ever June, and the second warmest for the UK as a whole.
The June increases suggest that the May drop was a bump in the road. When looked at as a whole, the first six months of the year saw retail sales up 1.7%.
Filling up the car for day trips to take advantage of the sun played an important role in the retail sales growth.
When fuel is excluded, the rise was smaller, just 0.6%.
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Despite lower consumer sentiment and more expensive goods, consumers are benefitting from rising wages and are cutting back on savings.
The ONS lifestyle survey – backed up by hard data like the Bank of England’s money and credit figures – shows that households have rebuilt their rainy day savings and are cutting back on the amount of money they squirrel away each month.
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