Why the ECB took a pause on rates
Uncertainty over tariffs and the end of the normalisation of the cost of credit advise a wait-and-see orientation
2' min read
2' min read
A pause. Waiting for tariffs. The July meeting of the European Central Bank pointed, as expected, towards a confirmation of deposit rates at 2% and the refinancing rate at 2.25%. One phase of monetary policy has now come to an end. Nominal rates are now almost in expansionary territory: ready, so to speak, to counteract, if appropriate, a possible demand shock from a trade war.
Inflation expectations under control
Inflation expectations, as measured by market measures, also appear to have stabilised for almost a year now: they have been moving in a corridor between two and 2.2 per cent and have even temporarily fallen below the target. A look under the microscope shows some tension in March, coinciding with the uncertainties of the tariffs tensions: the interest rate swap rose to almost 2.23%, but this was a very rapid flare-up at levels that were in any case not worrying. There were, on the contrary, no sharp declines that could signal fears of some demand problem that would affect price dynamics.
Salaries "cooled"
.Underlying tensions have also declined. Wage inflation, which measures the difference between labour costs and unit productivity, fell sharply to below 2% in the first quarter of 2025, after a long overheating phase. It is a single figure, which therefore needs to be reconfirmed, but allows the ECB to wait at least one turn without worries.
The unsolvable knot of the gearbox
The euro could give entrepreneurs some cause for concern: the euro-dollar's rise is sharp but the levels are not yet worrying (the 'pain threshold', at least in the absence of tariffs, is usually much higher). The effective exchange rate, a weighted average of the exchange rates against the major currencies, reached its highest level in ten years on 3 July, but this is not, and cannot be, a target for monetary policy, which will deal, rather, with any effects on prices.
Loans on the rise
The trend in loans, moreover, remains fairly solid: the data collected by the ECB are not seasonally adjusted, but the annual variations show - after the long period of stagnation - a small series of robust increases, above the long-term median. In Euroland, falling bank rates are practically close to the long-term median - already reached in Italy - and the economy seems to be bearing the weight of uncertainty in the large aggregates.
