The monetary authorities around central bank president Christine Lagarde decided on Thursday at the ECB Council meeting in Frankfurt to leave the key interest rate at 4.25 percent. The deposit rate, which is the key rate on the financial market and which banks receive for parking excess funds, remains at 3.75 percent.
But from Lagarde’s perspective, the economy in the eurozone is on a growth path. There are indications that it grew in the second quarter, albeit more slowly than at the beginning of the year, the Frenchwoman said on Thursday following the interest rate decision in Frankfurt. The services sector is driving the recovery, while industrial production and goods exports remain weak. Looking ahead, consumption is also expected to contribute to the recovery.
The strengthening of real incomes through lower inflation and higher wages should make this possible. In addition, exports are expected to increase in line with increasing global demand. And, in Lagarde’s view, monetary policy should also slow economic demand less over time.
The ECB had made the interest rate turnaround in June and loosened the interest rate screw for the first time since 2019. The ECB Governing Council’s determination of the appropriate level and duration of the restrictive level will continue to depend on the data available and will be made from meeting to meeting, the ECB explained: “The ECB Governing Council does not commit itself in advance to a specific interest rate path.”
Announcement left investors cold
The announcement left investors largely unmoved. The DAX and the EuroStoxx50 remained at their gains of just under half a percent each. The euro remained slightly in the red at 1.09 dollars.
The first voices following the interest rate decision sounded satisfied. “We have only made a little progress on the path to combating inflation since the last interest rate decision,” explained Jörg Asmussen, General Manager of the German Insurance Association (GDV). It was therefore right that the ECB kept interest rates constant.
Economist expects “interest rate cut in September”
From the perspective of Ulrich Kater, chief economist at Dekabank, the ECB is in no hurry to ease further. “At the moment, things are looking good for another interest rate cut in September, because the stubbornly high inflation in services in the eurozone also gives hope of a calming down in the coming months.” However, there have been enough surprises in terms of prices recently.
In June, most inflation measures remained unchanged or fell slightly, the ECB said. Monetary policy is ensuring that financing conditions remain restrictive. Price increases in services are higher. Overall inflation is expected to remain above target well into next year. The ECB is aiming for 2.0 percent inflation as the optimal value for the currency area in the medium term. The central bank will keep interest rates sufficiently restrictive for as long as necessary to achieve this goal, the monetary authorities said.
Economists expect two reductions by 2025
Economists had expected a pause in interest rates. Inflation in the 20-country community did fall to 2.5 percent in June. This means it is no longer far from the ECB’s target. But inflation in the services sector is proving to be very persistent. In June, as in May, it was 4.1 percent. ECB President Lagarde said at the beginning of the month that it would take some time before the ECB had collected enough data to be sure that the danger of excessive inflation had been averted.
In addition, wage growth, one of the most important inflation drivers in the eurozone, has recently remained strong. In the first quarter, wages in the eurozone rose by 4.7 percent. According to ECB chief economist Philip Lane, recent company news indicates that wage growth is now slowing. According to a survey by the Reuters news agency last week, economists expect the ECB to cut interest rates twice more this year. The economists expect the interest rate meetings in September and December to see a reduction of a quarter of a percentage point each.
