MUFG: The European Central Bank is expected to pause interest rate cuts this week, leaving only a 25 basis point easing space for the rest of the year.

Mitsubishi UFJ Financial Group (MUFG) predicts that the European Central Bank will officially press the pause button on the seven consecutive interest rate cuts this week, keeping the deposit facility rate at 2% - right in the middle of the "neutral" range of 1.75%-2.25% defined at the beginning of the year. The bank stated that inflation has steadily returned to the 2% target, and although oil prices are slightly higher than previously predicted, the strong euro is enough to offset its inflationary effects. Therefore, the assessment that the policy is in a "good position" remains valid. Officials are satisfied with the current market pricing - a further 25 basis point rate cut expected within the year. The meeting will continue to follow the guidance of "data-dependent, meeting-by-meeting assessment, and no predetermined path", and deliberately avoid any comments that could shake market expectations to maintain maximum flexibility. As the August 1 deadline approaches and the space for reaching an agreement remains narrow, the risk of the situation deteriorating is high. If the final trade outcome is relatively moderate (i.e. US tariff rates set at 10%), MUFG may adjust their expectations for further rate cuts accordingly. If negotiations collapse and tariffs escalate further, the case for further easing will be more compelling, and interest rates may even be lowered to the slightly accommodative range of 1.5%. Further easing space still exists Regardless of the outcome of the trade negotiations, MUFG still believes there is room for further slight rate cuts. Between now and the next meeting in September, a series of key data will be released, including second-quarter GDP (expected to slow significantly) and unit labor compensation (expecting wage growth to slow). In this context, if inflation data for July-August is lower than expected again, decision-makers will find it harder to argue that low inflation is just a story of energy and exchange rates. Meanwhile, large-scale fiscal stimulus is about to be implemented in Germany, while the budget proposal for France, the Eurozone's second largest economy, is leaning towards austerity. The differentiation in fiscal efforts within the region will also affect the space and pace of monetary policy.