The European Central Bank kept borrowing costs steady on Thursday, giving policymakers more time to assess progress on inflation after last month’s first rate cut in five years.
The ECB’s governing board heads into the summer break leaving the key deposit rate at 3.75%, after cutting it from a record 4% at the June meeting.
The pause was widely expected after ECB President Christine Lagarde said policymakers would need time to gather sufficient data before deciding on the next move.
The ECB will keep interest rates “sufficiently restrictive for as long as necessary” to ensure inflation remains on track to return to its 2% target, the Frankfurt institution said in a statement.
The bank reiterated that policymakers will make decisions based on “a data-driven, meeting-by-meeting approach.”
Attention now turns to Lagarde’s press conference at 12:45 GMT, where observers will hear signs of a possible rate cut in September, when the ECB will have new growth and inflation forecasts.
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“Investors will be looking for hints of possible moves in September and beyond,” said Unicredit economist Marco Valli.
Eurozone inflation peaked at 10.6% in 2022 after Russia’s war in Ukraine and supply problems related to the pandemic pushed up prices, prompting the ECB to launch an aggressive monetary tightening cycle.
Inflation in the 20-nation currency club has fallen steadily since then, easing to 2.5% in June from 2.6% in May.
Progress in inflation led the ECB to cut borrowing costs for the first time since 2019 in June, bringing some relief to households and businesses.
Lagarde said in Sintra, Portugal this month that inflation was “going in the right direction” but warned it would likely be “a bumpy road until the end of 2024”.
Sticky services, high wages
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Policymakers are closely watching core inflation, which strips out volatile food and energy prices and remained stubbornly high at 2.9 percent in June.
Inflation in the services sector was steady at 4.1%, an increasing headache for ECB officials.
The ECB also hopes to see a slowdown in wage growth, which has picked up as eurozone workers seek pay rises to offset higher living costs.
“Stability in service prices, fast wage growth and a resilient labor market” all held up “against successive rate cuts,” Unicredit’s Valli said.
The eurozone economy, meanwhile, emerged from recession with stronger-than-expected growth of 0.3% in the first quarter of 2024.
But recent data suggested the recovery “lost steam” in the second quarter, ING economist Carsten Brzeski said, potentially strengthening the case for another rate cut to boost economic activity.
Given that the ECB will have more difficult data going into its next meeting in September, most observers see that as the most likely time for a second cut.
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A further rate cut is then expected before the end of the year, possibly in December, according to analysts.
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September is also when the Federal Reserve is increasingly expected to start cutting interest rates, on the belief that US inflation will fall to target.
Lagarde, a former French finance minister, can also expect to be under fire on Thursday over political uncertainty in her country after snap elections led to a hung parliament.
French central bank chief Francois Villeroy de Galhau last week called for a reduction in the country’s large deficit amid concerns that increased government spending could push up inflation.
“We expect President Lagarde to be cautious in her responses to direct questions about France,” Deutsche Bank economists said in a note.
He is likely to say “that the ECB is cautious about what is going on” and reiterate “that euro area member states have agreed a fiscal framework that they are expected to abide by,” they added.
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Source: AFP