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The European Central Bank has kept its key interest rate at 3.75 percent. Its chief Christine Lagarde said the decision on a possible cut in September was “widely open” but she played down fears of persistent price pressures.
The ECB Governing Council’s decision to leave the deposit rate unchanged was in line with market expectations, as there are concerns that geopolitical uncertainty and rapid wage increases will continue to push up prices.
“What we do in September is completely open and will be determined on the basis of all the data we will receive,” Lagarde said at a news conference after Thursday’s decision.
She added that the board, which cut rates from a record high of 4 percent in June, had decided not to provide guidance on future rate decisions.
The euro then fell against the dollar, trading down 0.3 percent at $1.0905 by mid-afternoon.
The ECB wants more evidence that inflation, which fell to 2.5 percent in June after peaking at 10.6 percent in 2022, is still on track to fall to the 2 percent target by the end of next year.
On Thursday, it said recent data were “broadly supportive” of such a scenario, while downplaying signs that inflation in the services sector could remain high.
“While some measures of underlying inflation rose in May due to one-off factors, most measures were stable or declined slightly in June,” the board said.
The eurozone is struggling with 5 percent wage growth as workers demand compensation for the worst inflation in a generation.
But Lagarde said the recent wage increases “did not come as a surprise” and that wages are still expected to rise more slowly over the course of 2025 and 2026. “That is the direction in which things are going,” she said.
While inflation in the eurozone was on a “disinflationary track,” the ECB would still have to keep interest rates high. “We will remain in restrictive territory as long as it takes to reach the target and we are not there yet,” Lagarde said.
She added that the eurozone economy was expected to grow “at a slower pace” in the second quarter than the 0.3 percent expansion in the first three months of this year. Risks to growth were “on the downside”.
Traders on the swap markets put the chance of a rate cut in September at 65 percent, compared with 73 percent just before the decision.
Dirk Schumacher, a former ECB economist now at French bank Natixis, said Lagarde’s reluctance to clearly indicate his next move was “the sensible thing to do, given the uncertainty and the premature commitment in June”.
Several council members felt uncomfortable with the clear reference to the June rate cut, leaving them with little choice but to press on despite some unwelcome signals from the economic figures.
Ratemakers are also concerned about political unrest, especially after this month’s inconclusive election result in France raised doubts whether a new, high-spending government in the region’s second-largest economy would boost inflation.
Lagarde stressed that all eurozone countries must adhere to the EU’s new budget rules. The provisions require countries with high debts, such as France and Italy, to reduce them by reducing their budget deficits to 3 percent over time.
“This is the set of rules that must be implemented and respected,” she said.
The ECB president said it would launch a review of the new strategy it introduced two years ago “fairly soon” and present the results next year. She added that it would not consider changes to the 2 percent target or the idea of publishing individual policymakers’ interest rate expectations in a “dot plot” in the style of the U.S. Federal Reserve.
Additional reporting by Mary McDougall in London