ECB Pauses Rates Ahead Of Likely September Cut

(RTTNews) - The European Central Bank left its key interest rates unchanged on Thursday, as expected, after lowering them for the first time in five years in the previous session, as policymakers head into a summer break ahead of a possible rate reduction in September even as they worry about the sticky inflation.

The Governing Council, led by ECB President Christine Lagarde, held the main refinancing rate at 4.25 percent, the deposit facility rate at 3.75 percent and the marginal lending rate at 4.50 percent.

"The Governing Council is determined to ensure that inflation returns to its 2 percent medium-term target in a timely manner," the ECB said.

"It will keep policy rates sufficiently restrictive for as long as necessary to achieve this aim."

The ECB reiterated that the Governing Council is not pre-committing to a particular rate path and did not give further forward guidance this time.

In June, the ECB cut interest rates for the first time since 2019, citing an improvement in the inflation outlook.

Incoming information broadly supports the Governing Council's previous assessment of the medium-term inflation outlook, the central bank said.

The bank attributed the high core inflation to one-off factors, which were expected to remain stable or slow in June. Latest data from Eurostat showed that headline consumer price inflation eased to 2.5 percent in June, while the core figure remained unchanged at 2.9 percent, thus raising some concern for rate-setters.

Services inflation was also steady at 4.1 percent, adding to the stickiness of price growth in the euro area.

The inflationary impact of high wage growth has been buffered by profits, the bank said.

"At the same time, domestic price pressures are still high, services inflation is elevated and headline inflation is likely to remain above the target well into next year," the ECB observed.

Other economic indicators such as confidence gauges and the PMI survey results, released in recent weeks, failed to paint a rosy picture for the single currency economy. Instead, they pointed to a slowing economy that is reeling under the pressure of elevated inflation and high interest rates.

A rate cut in September still seems more likely than not, but the move will depend on whether domestic price pressures ease, Capital Economics economist Jack Allen-Reynolds said.

"There will be two more inflation releases before the September meeting, and we suspect that they will show enough evidence of easing underlying price pressure to encourage the Bank to cut at that meeting," the economist added.

"But the risks are skewed towards the ECB extending its pause in September and interest rates coming down more slowly than we are forecasting."

ING economist Carsten Brzeski said the ECB won't have any interest in making the June cut look like a policy mistake over the coming weeks, which would be a strong non-economic argument in favor of another rate cut at the September meeting. "At the same time, however, weakening economic momentum, stubbornly high domestic inflation and a risk of elevated wage growth is not a combination to cheer for, and this will make it harder for the hawks to agree on a September cut," the economist said.