European Central Bank opts for widely expected summer rate pause at 3.75 per cent

FRANKFURT – The European Central Bank (ECB) held borrowing costs steady on July 18, giving policymakers more time to assess the progress on inflation after June’s first interest rate cut in five years.

The ECB’s governing council heads into the summer break, leaving the benchmark deposit rate at 3.75 per cent, after lowering it from a record four per cent 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 rates “sufficiently restrictive for as long as necessary” to ensure inflation remains on track to return to the 2 per cent target, the Frankfurt institution said in a statement.

The bank reiterated that policymakers would make decisions based on “a data-dependent and meeting-by-meeting approach”.

Attention then shifted to Ms Lagarde’s press conference in the afternoon of July 18, where observers listened for clues about a possible rate cut in September, when the ECB will have new growth and inflation forecasts.

“Investors will look for hints on potential moves in September and afterwards,” Unicredit economist Marco Valli said.

Eurozone inflation hit a peak of 10.6 per cent in 2022 after Russia’s war in Ukraine and Covid-19 pandemic-related supply woes pushed prices up, prompting the ECB to launch an aggressive cycle of monetary tightening.

Inflation in the 20-nation currency club has fallen steadily since then, easing to 2.5 per cent in June from 2.6 per cent in May.

Progress on inflation led the ECB to lower borrowing costs for the first time since 2019 in June, bringing some relief to households and businesses.

Ms Lagarde said in Portugal’s Sintra in July that inflation was “heading in the right direction”, but cautioned that it would likely be “a bumpy road until the end of 2024”.

Sticky services, high wages

Policymakers are in particular keeping an eye on core inflation, which strips out volatile food and energy prices, and remained stubbornly high at 2.9 per cent in June.

Inflation in the services sector was sticky at 4.1 per cent, increasingly becoming a headache for ECB officials.

The ECB is also hoping to see a slowdown in wage growth, which has been elevated as eurozone workers seek salary increases to compensate for higher living costs.

“Stickiness in services prices, fast wage growth and a resilient labour market” all argued “against back-to-back rate reductions”, said Unicredit’s Mr Valli.

The eurozone economy meanwhile emerged from recession with greater-than-expected growth of 0.3 per cent in the first quarter of 2024.

But recent data suggested the recovery “has lost steam” in the second quarter, said ING economist Carsten Brzeski, potentially strengthening the case for another rate cut to bolster economic activity.

Given that the ECB will have more hard data to go on at its next meeting in September, most observers see that as the likeliest time for a second cut.

One further rate reduction is then expected before the end of 2024, possibly in December, according to analysts.

Ms Lagarde, a former French finance minister, can also expect to be grilled about political uncertainty in her home country after snap elections produced a hung Parliament.

French central bank chief Francois Villeroy de Galhau last week called for reducing the country’s large deficit, amid concerns that increased government spending could push up inflation.

“We expect president Lagarde to be guarded in her responses to direct questions on France,” Deutsche Bank economists said in a note.

She is likely to say “that the ECB is attentive to what is happening” and reiterate “that euro area member states have agreed a fiscal framework with which they are expected to comply”, they added. AFP