The European Central Bank (ECB) has kept its main interest rates on hold at 4.25 per cent for its lending rate and at 3.75 per cent for its deposit rate, as its chief, Christine Lagarde, said the decision on a possible cut in September was “wide open” but downplayed fears of sticky price pressures. Its lending rate is the one that impacts on mortgages.
The ECB governing council’s decision to leave its key rates 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,” Ms Lagarde said at a press conference after Thursday’s decision.
She added that the governing council, which cut its lending and deposit rates in June from a record high of 4.5 per cent and 4 per cent respectively, had agreed it would not provide guidance on future rate decisions.
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The euro fell against the dollar afterwards, and was down 0.3 per cent at $1.0905 by midafternoon.
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 euro zone 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 Ms 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 euro zone 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,” Ms Lagarde said.
She added that the euro zone 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”.
Copyright The Financial Times Limited 2024
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