The European Central Bank (ECB) has kept its main interest rate unchanged at 3.75 percent. ECB President Christine Lagarde stated that the decision on a possible rate cut in September is “wide open” but downplayed concerns about persistent price pressures.
No guidance on future rate decisions
The ECB’s governing council decided to leave the benchmark deposit rate on hold, in line with market expectations. This comes amid concerns that geopolitical uncertainty and rapid wage growth will continue to drive up inflation.
Lagarde said the decision on September’s policy move is “wide open and will be determined on the basis of all the data we will be receiving.” The governing council had agreed not to provide guidance on future rate decisions, she added.
Concerns over persistent services inflation
Several council members noted that there was a clear agreement to leave their options open on a potential September rate cut. They noted that services inflation above 4 percent was “a worry” that could delay a rate cut until later in the year.
Euro falls after ECB decision
The euro fell against the dollar after the ECB decision, declining 0.3 percent to $1.0905.
ECB wants more evidence of disinflation
The ECB wants more evidence that inflation, which slowed to 2.5 percent in June after peaking at 10.6 percent in 2022, is still on track to reach the 2 percent target by the end of 2024. Lagarde said recent data “broadly supports” this scenario, despite signs that services inflation could remain high.
High wage growth amid inflation
The Eurozone is facing wage growth of around 5 percent, as workers seek compensation for high inflation. However, Lagarde said the recent pay increases “did not come as a surprise” and that wages are still expected to rise less quickly in 2025 and 2026.
Rates to remain high until inflation target is reached
While Eurozone inflation is on a “disinflationary track,” the ECB will need to keep rates high “for as long as it takes to get to target.” Lagarde added that the Eurozone economy is expected to have grown at a “slower pace” in the second quarter compared to the 0.3 percent expansion in the first quarter, with risks to growth “tilted to the downside.”
Traders expect smaller chance of September rate cut
Traders in swaps markets put the chances of a September rate cut at 65 percent, down from 73 percent before the decision. Former ECB economist Dirk Schumacher said Lagarde’s reluctance to clearly signal the next move was “the prudent thing to do, given the uncertainty and the too early commitment in June.”
Read more: ECB stays committed to multiple rate cuts despite Fed’s caution, global uncertainty
Adherence to EU fiscal rules emphasized
Lagarde stressed that all Eurozone countries would need to adhere to the EU’s new fiscal rules, which require countries with high debt levels to bring down their budget deficits to 3 percent over time. She said this “set of rules has to be implemented and respected.”
Upcoming ECB strategy review
The ECB president also said the bank will soon begin an assessment of the new strategy it put in place three years ago and present the results next year. However, she added that the ECB will not consider changes to its 2 percent inflation goal or the idea of publishing individual policymakers’ rate expectations.
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