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The European Central Bank has kept its main interest rate at 3.75 per cent, as its chief Christine Lagarde said the decision on a possible cut in September was “wide open” but downplayed fears of sticky price pressures.
The ECB governing council’s decision to leave its benchmark deposit rate on hold was in line with market expectations, amid concerns that geopolitical uncertainty and rapid wage rises will keep pushing up prices.
“What we do in September is wide open and will be determined on the basis of all the data that we will be receiving,” Lagarde said at a press conference after Thursday’s decision.
She added that the governing council, which cut rates in June from a record high of 4 per cent, had agreed it would not provide guidance on future rate decisions.
The euro fell against the dollar afterwards, and was down 0.3 per cent at $1.0905 by mid-afternoon.
The ECB has said it wants more evidence that inflation, which slowed to 2.5 per cent in June after peaking at 10.6 per cent in 2022, is still on track to fall to its 2 per cent target by the end of next year.
It said on Thursday that recent data “broadly supports” such a scenario, playing down signs that services inflation could remain high.
“While some measures of underlying inflation ticked up in May owing to one-off factors, most measures were either stable or edged down in June,” the governing council said.
The Eurozone is contending with wage growth of 5 per cent, as workers demand to be compensated for the worst bout of inflation for a generation.
But Lagarde said recent pay increases “did not come as a surprise”, and that wages were still expected to rise less quickly over the course of 2025 and 2026. “That is the direction that it is heading,” she said.
While Eurozone inflation was on a “disinflationary track”, the ECB would still need to keep rates high. “We will stay in restrictive territory for as long as it takes to get to target and we are not at target,” Lagarde said.
She added that the Eurozone economy was expected to have grown “at a slower pace” in the second quarter than the 0.3 per cent expansion in the first three months of this year. Risks to growth were “tilted to the downside”.
Traders in swaps markets put the chances of a September rate cut at 65 per cent, down from 73 per cent immediately before the decision.
Dirk Schumacher, a former ECB economist now at French bank Natixis, said Lagarde’s reluctance to clearly signal its next move was “the prudent thing to do, given the uncertainty and the too early commitment in June”.
Several council members had been uncomfortable at how clearly it pointed to the rate cut in June, leaving them little choice but to go ahead despite some unwelcome signals from economic data.
Rate-setters are also worried about political turmoil, especially after this month’s inconclusive election result in France raised doubts over whether a high-spending new government in the region’s second-largest economy would push up inflation.
Lagarde stressed that all Eurozone countries would need to adhere to the EU’s new fiscal rules. The provisions require countries with high debt levels such as France and Italy to bring them down by lowering their budget deficits to 3 per cent over time.
“This is the set of rules that has to be implemented and respected,” she said.
The ECB president said it would start an assessment “reasonably soon” of the new strategy it put in place two years ago and present the results next year. She added that it would not consider changes to its 2 per cent goal or the idea of publishing the rate expectations of individual policymakers in a US Federal Reserve-style “dot plot”.
Additional reporting by Mary McDougall in London
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