The European Central Bank (ECB) held interest rates steady in July, signalling cautious confidence in its inflation-control strategy. With inflation now at the 2 percent medium-term target, the ECB opted to maintain the deposit, refinancing, and lending rates at 2.00 percent, 2.15 percent, and 2.40 percent respectively. Easing domestic price pressures and slowing wage growth suggest that past rate cuts are being felt throughout the economy, helping to anchor inflation without derailing growth.

Yet, despite this stability, the ECB is not declaring victory. The outlook remains clouded by global trade tensions and persistent uncertainty. Instead of outlining a fixed path, the Governing Council reaffirmed its data-driven, meeting-by-meeting approach, signalling flexibility and vigilance.

Balance sheet normalisation continues, with both the Asset Purchase Programme (APP) and the Pandemic Emergency Purchase Programme (PEPP) portfolios gradually winding down. Meanwhile, the Transmission Protection Instrument remains in place as a backstop against market fragmentation across eurozone countries.

In essence, the ECB is treading carefully, balancing progress on inflation with a readiness to act if conditions worsen. Its current stance reflects a strategy of watchful waiting, ensuring inflation remains on target while retaining tools to counter unexpected shocks.

With rates at neutral, no change is expected as policy-makers wait for the Aug. 1 US tariff deadline to see what the EU faces.

The European Central Bank (ECB) sets monetary policy for all members of the Eurozone. The highest decision-making body is the Governing Council which comprises the six members of the Executive Board and the 20 presidents of member central banks. Policy meetings take place roughly every six weeks but, due to the sheer number of participants, a rotation system has been introduced so that the total number of votes is capped at twenty-one. The benchmark interest rate is the rate on the main refinancing operations (refi rate) which sits between the marginal lending facility rate and deposit rate. The ECB's primary objective is price stability which since July 2021 is based upon a symmetric 2 percent target for the annual inflation rate.

The European Central Bank determines interest rate policy at their Governing Council meetings. The Council is composed of the six members of the Executive Council and 17 presidents of member central banks (Bank of France, Bundesbank, etc). The Governing Council meets now meets every six weeks. The European Central Bank had an established inflation ceiling of just less than 2 percent which was modified in July 2021 to 2 percent. The ECB's measure of inflation is the harmonized index of consumer prices (HICP). Each member of the Governing Council has one vote and decisions are reached by simple majority. In the event of a tie, the President has the casting vote. Only short-form minutes are released so how individual members voted is not known.

As in the United States, European market participants speculate about the possibility of an interest rate change at these meetings. If the outcome is different from expectations, the impact on European markets can be dramatic and far-reaching. The rate set by the ECB serves as a benchmark for all other interest rates in the Eurozone.

The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the stock market, while lower interest rates are bullish.