ECB Won’t Flinch Yet in the Shadow of Trump’s Trade War

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(Bloomberg) — The European Central Bank is likely to stare down the economic danger posed by US President Donald Trump’s tariffs by opting to leave a potential cut in borrowing costs for another day.

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In their final decision before a seven-week summer break, policymakers on Thursday will probably keep the interest rate unchanged at 2%, pushing off a response to Trump’s threatened tariffs of 30% until they materialize and their impact can be better assessed.

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With many officials likely to use the interlude for a long holiday, the temptation to restate that inflation is at target, and to postpone worrying about the economic outlook until new quarterly forecasts are compiled for the Sept. 10-11 meeting, may seem appropriate.

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What policymakers do know, however, is that trouble is lurking. Aside from concerns about tariffs, the euro has strengthened, damping the outlook for prices and threatening to further squeeze exporters. Meanwhile, another political crisis in France may be brewing over its bloated public finances. 

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Given that backdrop, the ECB Governing Council could acknowledge among themselves that the chance of another rate cut in September is growing, even if they stick with their well-worn “meeting-by-meeting” approach to decision making. 

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In that vein, President Christine Lagarde, in her opening statement to reporters on Thursday, is likely to restate that risks to growth are “tilted to the downside,” Morgan Stanley economists wrote in a preview titled “Ready for the Beach.”

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What Bloomberg Economics Says:

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“We expect the Governing Council’s language after the July 24 meeting to be similar to the wording in June, leaving open the possibility of additional cuts without committing to them.”

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—David Powell, senior euro-area economist. For full analysis, click here

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Economic reports in the coming week will inform their deliberations. They include the ECB’s own bank lending survey, due on Tuesday, consumer confidence on Wednesday, and purchasing manager indexes from across the region and other major economies, set for release on Thursday, hours before the outcome of the ECB deliberations. 

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Other key indicators such as Germany’s closely-watched Ifo business confidence and Italian economic sentiment will follow on Friday. 

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Elsewhere, inflation numbers from Japan to Brazil and testimony by the UK central bank chief are among the things in store for investors.

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Click here for what happened in the past week, and below is our wrap of what’s coming up in the global economy.

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US and Canada

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The US economic data calendar is relatively light and highlighted by a pair of housing market reports. On Wednesday, June data from the National Association of Realtors are projected to show a third month of scant change in sales of previously owned homes. Contract closings have been hovering near an annualized rate of 4 million, just above last year’s level that was the weakest since 2010.