Danske Bank: European Central Bank will not cut interest rates this week. The outcome of trade negotiations is crucial for future policy.

Danske Bank said that the European Central Bank will maintain interest rates this week, with the focus being on any signals regarding the September meeting. Since the June meeting, communication from the European Central Bank has been very consistent, with most members agreeing that the ECB is in a favorable position. Schnebel said that the threshold for lowering interest rates again is very high. The ECB has been downplaying the fact that inflation expectations will temporarily be below the 2% target as long as medium-term inflation expectations stabilize. The minutes of the June meeting indicate that monetary policy should reduce its response to data and only significant shocks warrant a monetary policy response. Therefore, the ECB will not lower interest rates in July; it is expected to lower rates to 1.75% in September, with the risk leaning towards keeping rates unchanged. However, given the risks of a trade war, weakness in the service sector, and a potential slowdown in wage growth that could affect medium-term inflation expectations, it is still expected that the ECB will lower rates in September. The outcome of trade negotiations will be crucial for the future policy path, as US tariffs on the EU exceeding 10% would deviate from the ECB's baseline assumptions.