ECB likely to leave key interest rates unchanged on Thursday
Published: Tuesday, Jul 16th 2024, 14:40
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At the beginning of June, the European Central Bank (ECB) cut interest rates for the first time in almost five years - but experts believe that it is likely to pause again at its upcoming meeting on Thursday. The development of inflation, particularly in the services sector, still seems too unpredictable.
In an unprecedented series, the ECB raised its key interest rates ten times in succession between mid-2022 and October 2023. The central bank then paused between October 2023 and June 2024 before the ECB Governing Council decided at its last meeting to cut the three key interest rates by 0.25 percentage points each.
The central key interest rate at which commercial banks can borrow money from the ECB has been 4.25 percent since then. The interest rate for the short-term procurement of money, the marginal lending rate, fell to 4.5 percent. The deposit rate relevant for savers fell to 3.75 percent.
Decision only after data
ECB President Christine Lagarde has repeatedly questioned whether further interest rate hikes will follow immediately at the next meetings. "We know where we currently stand, but there will be further obstacles along the way," she said after the last Governing Council meeting at the beginning of June. The central bankers would continue to rely on the data on inflation, the outlook and the effects of their monetary policy and only then make a decision, Lagarde emphasized.
According to ING analyst Carsten Brzeski, "not much important data has been published" since the June meeting. The figures that are available tend to point to weaker growth, lower overall inflation, but "sluggish core and services inflation".
Inflation in the eurozone recently stood at 2.5%, while core inflation excluding food, energy, alcohol and tobacco was slightly higher at 2.9%. Services were even 4.1% more expensive than in the same month last year.
Interest rate hike in September?
Fritzi Köhler-Geib, chief economist at the state development bank KfW, also believes that the ECB's "prudence" in probably refraining from a further reduction is "appropriate". However, she expects a further interest rate cut in September. "However, an essential prerequisite is that the signs of a slowdown in wage growth become more pronounced by then," she explained.
Meanwhile, Brzeski does not expect the meeting on Thursday to provide any indication of the next steps to be taken at the meeting after next in September. That would be "premature, not to say irresponsible", he explained. For the ECB, the situation ahead of the meeting in September, before which there will be further data, is not easy: on the one hand, it is fighting against the stubborn inflation, on the other hand, the June decision must not look like a mistake.
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