Source – reuters.com
Unanimous Decision to Hold Rates
The European Central Bank (ECB) maintained its key interest rate at 3.75% in a unanimous decision on Thursday, following June’s landmark rate cut. The ECB emphasized the possibility of a further rate cut in September, describing the decision as “wide open.” The bank’s Governing Council stated that monetary policy remains restrictive while domestic price pressures, particularly in services, continue to be high.
Inflation and Economic Outlook
Recent data supports the ECB’s medium-term outlook for inflation to converge at 2%. Despite a slight dip in eurozone headline inflation to 2.5% in June from 2.6%, core inflation, excluding volatile components like energy and food, remained steady at 2.9%, surpassing consensus forecasts. The ECB highlighted ongoing concerns over inflationary pressures, particularly from the labor market.
European Central Bank President Christine Lagarde noted that wages continue to rise at an elevated rate to compensate for previous high inflation periods. While this has contributed to unique labor cost growth, there was a slight deceleration in the first quarter of the year. Lagarde expects inflation to fluctuate for the rest of the year but to decline overall in the second half due to weaker labor costs, the effects of monetary policy, and the diminishing impact of price shocks.
Future Rate Cuts on the Horizon
Market expectations suggest two more 25 basis point cuts this year, in September and December, with a pause anticipated during the ECB’s October meeting. Lagarde confirmed the unanimity of the July decision, contrasting with June when Austrian central bank governor Robert Holzmann dissented. She reiterated the ECB’s commitment to a data-dependent approach, deciding on a meeting-by-meeting basis.
Kiran Ganesh, Chief Investment Officer at UBS Global Wealth Management, told CNBC’s Silvia Amaro that the European Central Bank is likely to cut rates in September. He advised investors to lock in current interest rates before they decline, noting that the euro and the dollar might follow similar interest rate paths moving forward.
Global Comparisons and Market Reactions
The ECB’s approach contrasts with the U.S. Federal Reserve, which is expected to begin cutting rates in September and continue trimming rates until January 2025. Meanwhile, Switzerland, Sweden, and Canada have already cut rates this year. Recent UK inflation data, however, has reduced market bets on an August rate cut from the Bank of England, boosting the British pound.
Mark Wall, Chief European Economist at Deutsche Bank Research, indicated that the ECB is likely to proceed with a September rate cut despite some unfavorable recent inflation data. He noted that the ECB is taking comfort from broader trends and remains committed to a data-dependent, rather than data point-dependent, strategy.
The European Central Bank’s decision left European markets relatively unchanged, with the euro trading slightly lower against the U.S. dollar and higher against the British pound, while stocks across the region saw modest gains.
