The European Central Bank is set to announce its latest monetary policy decision on Thursday 25 July, with markets overwhelmingly expecting the central bank to hold its main refinancing rate at 3.75%. The decision comes after the ECB delivered a quarter-point cut in June, the first reduction since 2019, as inflation across the eurozone continues to ease.
Eurostat data published this week showed annual inflation in the single currency bloc fell to 2.2% in June, down from 2.6% in May and edging closer to the ECB's 2% target. However, core inflation — which strips out volatile energy and food prices — remained stickier at 2.9%, while services inflation held at 4.1%, giving policymakers reason to proceed cautiously.
For UK investors, the ECB's stance carries direct consequences. The FTSE 100, which derives roughly 70% of its revenues from overseas, is particularly sensitive to eurozone monetary policy. A prolonged hold on rates could keep the euro relatively strong against sterling, affecting the value of dividends repatriated by UK-listed companies with large European exposure, such as Unilever and AstraZeneca. The pound sterling was trading at €1.18 on Friday, near its highest level in two years.
Analysts at ING noted in a research note that the ECB is likely to 'maintain a data-dependent approach, with the next cut not guaranteed until September at the earliest'. Markets are currently pricing in a 60% probability of a further quarter-point reduction in September, according to Refinitiv data. Any hawkish language from ECB President Christine Lagarde at the post-meeting press conference could push back those expectations, potentially weighing on European equities and bond prices.
UK pension holders with exposure to European government bonds or eurozone equity funds should be aware that a delayed rate-cutting cycle could reduce the near-term returns on those assets. Conversely, a more dovish signal could boost European stock markets and narrow bond yields, benefiting diversified portfolios. The Euro Stoxx 50 index has gained 8% so far this year, partly on hopes of monetary easing.