The European Central Bank has chosen to wait and see before continuing to remove the bandage covering the skin of the Community economy, which has been wounded by an inflationary crisis that has lasted three long years. The institution led by Christine Lagarde has stuck to its planned script and unanimously left the interest rate unchanged at 4.25% this Thursday, a historically high rate that penalizes companies and individuals with a variable rate and restricts financing with the aim of keeping price increases at bay. . In the statement sent today, the entity points out that its interest rate decisions “will be based on its assessment of the inflation outlook, taking into account new economic and financial data, the dynamics of underlying inflation and the intensity of monetary policy.”
What will happen from here? The bank avoided giving any indications. “The Governing Council has not committed itself in advance to a specific rate path.” And it warned: “Domestic inflationary pressures remain intense, inflation in the services sector is high and headline inflation is likely to remain above target.” [del 2%] until well into next year.”
In addition to the main interest rate, which is used for lending transactions to banks, the monetary authority kept the deposit rate (the interest paid to banks that leave their money with the ECB) at 3.75% and the marginal lending rate at 4.5%. After the announcement, the euro price against the dollar remained flat.
The pause sends a message: if the rapid rise in interest rates was built up with ten consecutive increases in the money price, the decline will not follow the same vertical dynamic. However, given the good performance of the labor market – the unemployment rate is at 6.4%, the lowest since the existence of the euro – and the limited risk of recession – Frankfurt expects a slowdown in the second quarter, with the service sector holding up but industry and exports in decline – give some room to make a stop along the way.
The June reductionof 25 basis points (from 4.5% to 4.25%), was a first breath of fresh air, of a certain audacity considering that the decision was taken without the Federal Reserve taking any action whatsoever –everything points to interest rates being cut in Septemberafter four and a half years without doing so. It was also a way to silence the voices accusing him of following his American counterparts. The potential collateral effect of this step forward alone, in the form of an eventual weakening of the euro that would make imports more expensive and in turn generate more inflation, has not materialized for the time being.
Lagarde, who was part of a leading French synchronized swimming team in her adolescence in Le Havre, has had no trouble breaking the monetary choreography with her American colleague Jerome Powell, but harmony is likely to return quickly: the market is giving strong odds that the ECB will cut interest rates again at its meeting on September 12. However, the ECB president took nothing for granted and stressed in her speech that everything is “very open” and that they will carefully analyze any new data that comes out in the weeks leading up to the next meeting. “It is clear that we will receive a lot of information between now and September. GDP, inflation, salaries… I am afraid it is going to be a very busy summer.”
There are three more meetings of the Governing Council until the end of the year, and in two of them austerity measures are expected, the one mentioned earlier in September and the one in December – in October there would be another pause. This is what the majority of economists consulted by Reuters believe, and this has been expressed recently, among others, by the governors of the Bank of Finland, Oli Rehn, and that of Lithuania, Gediminas Simkus, although there is no unanimity between hawks and doves in Frankfurt, and the ECB stressed on Thursday that it will not hesitate to take firm action in the fight against inflation. “The Governing Council is determined to ensure that inflation returns promptly to its medium-term objective of 2%, and will keep official interest rates at sufficiently restrictive levels for as long as necessary to achieve that objective.”
Eurozone inflation fell by a tenth to 2.5% in Juneonly five-tenths above the target threshold, but at a time when service sector inflation is growing above 4% and wages are rising at a rapid pace, approaching 5%. Lagarde attributed this to a recovery in the purchasing power that workers have lost over the past two years, and expects this to moderate in 2025 and 2026, although he reassured that corporate profits are absorbing these increases for the time being – the bank has conveyed the idea that it will not compromise on a clear path of rate cuts, and will instead take its decisions on a meeting-by-meeting basis based on the data available.
Lagarde even introduced a new concept, the WPP, which is increasingly important in the ECB’s debates on what to do with interest rates. On productivity, he notes some progress, “but not what we would like to see”, and hopes that improving consumption and demand will propel and accelerate the recovery.
Trump's shadow
On the geopolitical front, tensions in Ukraine and the Middle East are worrying, and the electoral focus is shifting from France, where the far right was ultimately defeated in parliamentary elections, to the United States. where the market starts anticipating a victory for Donald Trumpwith the resulting consequences for world trade in the form of higher tariffs. For Lagarde, commercial harmony is “especially important because exports are one of the engines of recovery. […] “We will be closely monitoring what happens in the United States.”
Following the end of the mandate of Governor Pablo Hernández de Cos, Spain was represented at the meeting by Margarita Delgado, who, as explained by ECB Vice-President Luis de Guindos, was part of the unanimous decision to suspend the rate cuts. When asked about this, Guindos recalled that appointing the new governor is a prerogative of the Spanish government, and that they have already made it clear that there will be a replacement before the next meeting.
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