European Central Bank Holds Interest Rates Unchanged, Keeps Markets Guessing On September Rate Cut

The European Central Bank (ECB) kept its key interest rates unchanged at its July meeting, aligning with market expectations.

The Governing Council did not provide specific guidance on future policy, stating they were “not pre-committing to a particular rate path,” slightly chilling market expectations which are heavily betting on a September rate cut.

The deposit rate remains at 3.75%, the refinancing rate at 4.25%, and the marginal lending rate at 4.5%. These rates were previously reduced by 25 basis points during the June meeting, marking the first rate cut by the ECB since 2019.

Domestic Price Pressures, Services Inflation Remain Elevated

Although some measures of underlying inflation ticked up in May due to one-off factors, most metrics were either stable or edged down in June. The inflationary impact of high wage growth has been mitigated by profits, and monetary policy continues to keep financing conditions restrictive, according to Frankfurt.

However, “domestic inflation remains high. Wages are still rising at an elevated rate, making up for the past period of high inflation,” ECB President Christine Lagarde stated.

Services inflation is considered elevated, and headline inflation is likely to stay above the ECB’s target well into next year.

Meeting By Meeting, Data-Dependent Approach

“The 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,” Lagarde said.

The ECB remains determined to ensure that inflation returns to its 2% medium-term target in a timely manner. European policymakers stated they will keep policy rates sufficiently restrictive for as long as necessary to achieve this goal, following a data-dependent and meeting-by-meeting approach.

Market Reactions

The euro, as tracked by the Invesco CurrencyShares Euro Currency Trust FXE, held broadly steady against the U.S. dollar at 1.0930.

European equity markets rose Thursday, with the broader Euro STOXX 50 Index, as tracked by the SPDR DJ Euro STOXX 50 ETF FEZ, rose 0.7%. France was the top performer among major European countries, with the CAC 40 index, as monitored through the iShares MSCI France Index Fund EWQ, rising 0.9%.

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