Eurozone: The European Central Bank (ECB) shifts to a neutral policy stance

■ After eight meetings, the ECB decided to keep the main policy interest rate unchanged.  
■ To retain policy flexibility amid uncertainty, no forward guidance was provided, emphasizing a neutral policy stance. 
 
    The European Central Bank (ECB) decided to keep its three main policy interest rates unchanged during the Council meeting on July 24. This marks the first time interest rates have been kept steady after eight consecutive meetings of rate adjustments. The ECB's statement remains largely unchanged, continuing to stress that appropriate policy decisions will be based on data reviewed at each meeting. ECB President Lagarde indicated at the press conference following the last Council meeting on June 5 that "the monetary policy cycle launched to respond to multiple shocks, such as the COVID-19 pandemic, the war in Ukraine, and the energy crisis, is coming to an end," suggesting that interest rate cuts will be paused. As a result, the fundamental assessments of the economy and prices, as well as the policy outlook, have remained unchanged after this meeting. At the press conference following the July meeting, she stated, "We are in a wait-and-see state" and underscored a policy of responding to potential risks in the coming months. While there remains room for policy maneuvering, such as further interest rate cuts to address economic and inflation uncertainties, no explicit guidance on future policy direction has been provided, reinforcing the current neutral stance. 

    Previous interest rate cuts have brought the policy interest rate close to a neutral level, and the Harmonized Index of Consumer Prices (HICP), which underpins the ECB’s inflation target, is generally approaching 2% year-on-year as expected. With gradual progress toward policy goals, there is no immediate need for further rate cuts as long as economic and price developments unfold as anticipated. The prospects for future rate reductions depend largely on U.S. tariff policies. In its macroeconomic outlook published in June, the ECB conducted scenario analysis regarding U.S. tariff policy, indicating that if trade tensions escalate after May 2025, economic growth and inflation will be lower than current forecasts; conversely, if tensions ease, they may surpass forecasts. Based on the outcomes of the EU-U.S. trade negotiations expected to conclude on August 1, the ECB intends to evaluate the impact on the eurozone economy and prices in its meetings after September and consider appropriate monetary responses. 

    Furthermore, any future rate reductions would move the policy interest rate further away from neutrality into an accommodative range, contrasting with previous cuts that moved rates from restrictive to neutral levels. This indicates a loosening of the tightening stance. As a result, the ECB's future policy assessments are expected to be more cautious. If U.S. tariffs significantly reduce domestic demand within the euro area, rate cuts may become necessary. Regarding risks, factors such as downward pressure on the economy and prices from tariff increases, potential global supply chain disruptions raising import costs, supply bottlenecks within the eurozone, and increased spending on defense and infrastructure are identified as medium-term inflation risks. Until the impacts of these factors become clearer, the ECB will maintain a neutral position and conduct comprehensive evaluations.