ECB leaves rates unchanged in July

At its meeting on 18 July, the Governing Council of the European Central Bank (ECB) decided to keep the three key ECB interest rates—the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility—unchanged at 4.25%, 4.50% and 3.75%, respectively. The decision was in line with market expectations and followed a 25 basis point cut in June.

The ECB’s decision to maintain interest rates was primarily influenced by domestic factors, including still-high domestic price pressures—particularly for services—and the expectation that headline inflation will remain above target well into next year. The Bank noted that some measures of underlying inflation had increased due to one-off factors in May, while most others were stable or decreased in June as a result of still-tight monetary policy. Regarding activity, the ECB expects the Euro area economy to have slowed in the second quarter amid still-muted industrial and external sectors. Moreover, the Bank now views risks to the outlook as tilted to the downside.

The Governing Council did not provide specific forward guidance on the future path of interest rates but stated its determination to keep policy rates sufficiently restrictive for as long as necessary to ensure inflation returns to its 2.0% medium-term target. It emphasized a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction, indicating that future interest rate decisions will be based on its assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission without pre-committing to a particular rate path. Nonetheless, the ECB now views risks to economic growth as tilted to the downside, rather than balanced; this could support rate cuts in upcoming meetings despite persistent upside risks to inflation. Our Consensus is for around 50 basis points of interest rate cuts by end-2024. The next meeting is scheduled for 12 September.

Nomura analysts expect the ECB to cut twice this year: “The ECB will rely on its new forecasts at the September meeting, as well as data on wage growth and unit profits between now and the September meeting to determine [the future path for rates]. We expect wage growth and inflationary pressures to slow sufficiently, such that the ECB can cut twice more this year, in September and December.” Meanwhile, ING’s Carsten Brzeski is slightly more hawkish: “As we think that inflation will remain sticky and it actually needs a further weakening of demand to structurally bring inflation back to target, there is not a lot of room for manouvre for the ECB in the coming months. Picking up the ECB’s theme of data dependency, we see a 50% chance for a rate cut in September and a 100% chance for a cut in December.”

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