Unsurprisingly, the European Central Bank (ECB) left all three benchmark interest rates unchanged and held back from providing any updated guidance in today’s meeting. This follows June’s reduction across all three ECB benchmark rates by 25 basis points.

As a result of today’s meeting, the main refinancing rate, the marginal lending facility rate, and the deposit rate remain at 4.25%, 4.50%, and 3.75%, respectively. Europe’s single currency (EUR) and equity and bond markets witnessed muted price action following the announcement.

ECB Not Committing to a Particular Rate Path

The accompanying rate statement reiterated that the Governing Council will keep policy rates ‘sufficiently restrictive’ for as long as necessary to ensure inflation returns to the +2.0% inflation target. The Governing Council also repeated that the central bank will continue to adhere to a ‘data dependent and meeting-by-meeting approach to determine the appropriate level and duration of restriction’.

The statement provided limited information on the timeline for future rate cuts, repeating that the ECB are ‘not pre-committing to a particular rate path’.

Regarding inflationary pressures, the rate statement noted that higher profits had offset elevated wage growth and that although some measures of inflation did tick higher in May, most reports were lower in June. However, the rate statement added: ‘Domestic price pressures are still high, services inflation is elevated, and headline inflation is likely to remain above the target well into next year’.

Eurozone inflation in June was slightly softer at +2.5% (year on year) from May’s reading of +2.6%. However, core inflation defied market expectations of +2.8% and rose +2.9% in June. Price pressures in the services sector also remain an issue, underpinned by elevated wages. In terms of economic activity, the eurozone has largely been stagnant since 2022, and despite a pick-up in output in Q1 this year, recent surveys point to lacklustre growth.

The market’s focus will now shift to September’s policy meeting, during which we will receive updated economic forecasts for growth and inflation. Before this meeting, two more inflation reports and quarterly data on wages and economic growth will be released.

The Overnight Index Swaps (OIS) market shows that investors are still leaning towards a September cut (65% probability compared to a 70% probability before the announcement), with nearly 50 basis points of easing priced in (two rate cuts) for the entire year.

Press Conference: ECB President Christine Lagarde

ECB President Christine Lagarde held a press conference thirty minutes after the rate announcement. The central bank’s chief highlighted that the ECB is not pre-committed to a particular path and that it remains determined to get inflation back to the +2.0% inflation target.

Lagarde also underlined that the decision to hold rates was unanimous, which was not the case at the June meeting, where one dissenter voted for a hold rather than a rate cut. She highlighted that September’s meeting is ‘wide open and will be determined on the basis of all the data that we [the ECB] will be receiving’.

Lagarde underlined that ‘incoming information indicates that the euro area economy grew in the second quarter, but likely at a slower pace than in the first quarter. Services continue to lead the recovery, while industrial production and goods exports have been weak. Investment indicators point to muted growth in 2024, amid heightened uncertainty. Looking ahead, we expect the recovery to be supported by consumption, driven by the strengthening of real incomes resulting from lower inflation and higher nominal wages’.

The ECB President, however, added, ‘risks to economic growth are tilted to the downside. A weaker world economy or an escalation in trade tensions between major economies would weigh on euro area growth’.

DISCLAIMER:

The information contained in this material is intended for general advice only. It does not take into account your investment objectives, financial situation or particular needs. FP Markets has made every effort to ensure the accuracy of the information as at the date of publication. FP Markets does not give any warranty or representation as to the material. Examples included in this material are for illustrative purposes only. To the extent permitted by law, FP Markets and its employees shall not be liable for any loss or damage arising in any way (including by way of negligence) from or in connection with any information provided in or omitted from this material. Features of the FP Markets products including applicable fees and charges are outlined in the Product Disclosure Statements available from FP Markets website, www.fpmarkets.com and should be considered before deciding to deal in those products. Derivatives can be risky; losses can exceed your initial payment. FP Markets recommends that you seek independent advice. First Prudential Markets Pty Ltd trading as FP Markets ABN 16 112 600 281, Australian Financial Services License Number 286354.