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The European Central Bank kept its key interest rate at 3.75 percent as its chief Christine Lagarde said a decision on a possible cut in September was “wide open” but downplayed concerns about volatile price pressures.
The ECB Governing Council’s decision to keep its key deposit rate unchanged was in line with market expectations, amid concerns that geopolitical uncertainty and rapid wage growth will continue to push up prices.
“What we do in September is wide open and will be determined based on all the data we receive,” Lagarde told a news conference after Thursday’s decision.
She added that the Governing Council, which cut rates from a record 4 percent in June, agreed not to provide guidance on future rate decisions.
The euro then fell against the dollar and was down 0.3 percent at $1.0905 by mid-afternoon.
The ECB said it wanted further evidence that inflation, which slowed to 2.5 percent in June after peaking at 10.6 percent in 2022, was still on track to fall to its 2 percent target by the end of next year .
It said on Thursday that recent data was “broadly supportive” of such a scenario, playing down signs that services inflation could remain high.
“While some measures of core inflation rose in May due to one-off factors, most measures were either stable or down slightly in June,” the Governing Council said.
The euro zone is grappling with 5 percent wage growth as workers demand compensation for the worst burst of inflation in a generation.
However, Lagarde said the recent wage increase “didn’t come as a surprise” and that wages were still expected to grow less quickly through 2025 and 2026. “That’s the way it’s going,” she said.
While inflation in the Eurozone was on a “disinflationary path”, the ECB would still have to keep rates high. “We will remain in containment territory as long as it takes to get to the finish line, and we are not there,” Lagarde said.
She added that the eurozone economy was expected to grow at a “slower pace” in the second quarter than the 0.3 percent expansion in the first three months of this year. Risks to growth were “tilted to the downside”.
Traders in the swaps markets put the chance of a September rate cut at 65 percent, down from 73 percent just before the decision.
Dirk Schumacher, a former ECB economist now at the French bank Natixis, said Lagarde’s reluctance to clearly signal her next move was “a prudent thing to do, given the uncertainty and the too early commitment in June”.
Some council members were uncomfortable with how clearly it pointed to a rate cut in June, leaving them with no choice but to push ahead despite some unwelcome signals from the economic data.
Ratemakers are also worried about political upheaval, especially after an inconclusive election result in France this month raised doubts about whether a new high-spending government in the region’s second-largest economy would boost inflation.
Lagarde emphasized that all eurozone countries will have to comply with the EU’s new fiscal rules. The provisions require highly indebted countries such as France and Italy to reduce debt by reducing their budget deficits to 3 percent over time.
“This is a set of rules that must be implemented and respected,” she said.
Martin Wolburg, an economist at Italy’s Generali Investments, said: “We are very concerned about the impact of politics, which could be a drag on activity but also on inflation.”
The ECB president said he would “reasonably soon” begin an evaluation of the new strategy it put in place three years ago and present the results next year. She added that she would not consider changes to her 2 percent inflation target or the idea of ​​publishing individual policymakers’ rate expectations in a Fed-style “dot chart.”
More news from Mary McDougall in London