ECB keeps rates unchanged as inflation ‘likely to remain above the target’ well into 2025

The European Central Bank (ECB) voted to leave interest rates unchanged on July 18 as policymakers continued to wrestle with mixed inflation signals.

In a move that was widely expected by economists, the ECB’s deposit rate was held steady at 3.75%. In its policy statement, the ECB reiterated that rates will remain “sufficiently restrictive for as long as necessary” to ensure inflation returns to the 2% target.

“Monetary policy is keeping financing conditions restrictive,” the central bank’s governing council 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.”

As Creditnews reported, the eurozone’s Consumer Price Index (CPI) fell to a 2.5% annual rate in June, but core inflation held steady at 2.9%, which was higher than expected.

The biggest worry came from service inflation, which accelerated to a 4.1% annual rate last month.

“We still have questions about service inflation,” the ECB’s chief economist, Philip Lane, said after the CPI report.

For many economists, lingering concerns about inflation made the ECB’s June rate cut harder to justify. That largely explains why top central bankers, including ECB President Christine Lagarde, have tiptoed around the idea of additional rate cuts.

ECB has learned its lesson

The ECB’s policy statement said officials aren’t “pre-committing to a particular rate path” and that future decisions will be “data-dependent.” This gives ECB officials policy cover to adjust interest rates slowly after they over-committed to rate cuts earlier this year.

In a press conference following the July 18 decision, Lagarde said the central bank’s upcoming September meeting was “wide open” as officials continued to monitor economic data.

Her message was consistent with a Creditnews report from last week, which said Lagarde is likely to keep a September rate cut on the table without being too committal.

Looking beyond the inflation data, there are signs that the eurozone economy could use a jolt from lower interest rates. Eurozone GDP expanded in the first quarter following six quarters of stagnant or negative growth.

As the World Economic Forum observed, the 20-nation currency bloc was in a “technical recession” in the second half of 2023 following back-to-back quarters of negative growth.

The International Monetary Fund (IMF) has raised its forecast for eurozone growth. It expects the currency bloc to grow 0.9% this year before accelerating to a 1.5% pace in 2025.

Germany, the currency bloc’s largest and most influential member, is expected to grow just 0.2% this year before rising 1.3% in 2025.

The eurozone “is poised to pick up after a nearly flat performance last year,” wrote IMF economic counselor Pierre-Olivier Gourinchas.

Central bankers “will need to carefully calibrate the pivot toward monetary policy easing to avoid an inflation undershoot,” he explained. That’s another way of saying the ECB will eventually need to cut interest rates more aggressively to avoid a deeper slowdown in economic activity.