Get your free copy of Editor’s Digest
FT editor Roula Khalaf picks her favourite stories in this weekly newsletter.
The European Central Bank (ECB) kept its key interest rate unchanged at 3.75%, with President Christine Lagarde saying a “decision is still open” about a possible rate cut in September, but downplayed concerns about rising inflationary pressures.
of European Central Bank The Governing Council’s decision to keep the benchmark deposit rate unchanged was in line with market expectations, amid concerns that geopolitical uncertainty and rapid wage growth will continue to push up prices.
“What we will do in September is still to be decided and will be based on all the data we receive,” Lagarde said at a news conference after Thursday’s decision.
He added that the Governing Council, which cut interest rates from a record 4 percent in June, had agreed not to provide guidance on future rate decisions.
The euro then fell against the dollar, down 0.3% to $1.0905 by mid-afternoon.
The ECB said it was seeking further evidence. inflationAfter peaking at 10.6% in 2022, it slowed to 2.5% in June but is expected to fall to the 2% target by the end of next year.
The bank said Thursday that recent data “broadly supports” that scenario, playing down signs that services price inflation might remain high.
“While temporary factors led to some increases in underlying inflation measures in May, most measures remained stable or declined slightly in June,” the Governing Council said.
The Eurozone Wage Increase Workers are demanding compensation for the worst inflation in a generation, with a 5% rise planned.
But Lagarde said the recent wage increases were “not a surprise” and that she still expects wage growth to slow through 2025 and 2026. “That’s the direction we’re heading,” she said.
Eurozone inflation is on a “disinflationary trajectory,” but the ECB still needs to keep interest rates high. “We will continue to tighten policy until we reach our target, which we are not there,” Lagarde said.
She added that the euro zone economy is expected to grow at a “more modest pace” in the second quarter than the 0.3% growth in the first three months of the year. Risks to growth are “tipped to the downside.”
Swaps market traders now rate the likelihood of a September rate cut at 65%, down from 73% just before the decision.
Dirk Schumacher, a former ECB economist now at French bank Natixis, said Lagarde’s reluctance to clearly signal her next move was “a wise move given the uncertainty and the premature decision in June.”
Some Governing Council members have expressed discomfort with the clear indication of a June rate cut, leaving them little choice but to go ahead with it despite some unfavorable signs from economic data.
Rate setters also Political turmoilIn particular, the unclear outcome of France’s general election this month has raised questions about whether a big-spending new government in the region’s second-largest economy will boost inflation.
Lagarde stressed that all euro zone countries need to comply with the EU’s new fiscal rules, which require highly indebted countries such as France and Italy to bring down their debt levels by reducing their budget deficits to 3% over time.
“It’s a set of rules that must be implemented and respected,” she said.
The ECB president said the bank would start evaluating the new strategy introduced two years ago “fairly early” and would publish the results next year, adding that it would not consider changing the 2 percent target or publishing policymakers’ interest rate forecasts in a Federal Reserve-style “dot plot.”
Additional reporting by Mary McDougall in London
