ECB leaves rates unchanged but investors left guessing on next steps
The European Central Bank (ECB) voted to leave interest rates on hold and left investors guessing about the likely path of interest rates in the months ahead.
The widely anticipated decision means the main interest rate remains at 3.75 per cent, while the main refinancing rate and the marginal lending facility will stay at 4.25 and 4.50 per cent respectively.
In a statement, the ECB said that the incoming data “broadly supports” its previous assessment of the inflation outlook.
“While some measures of underlying inflation ticked up in May owing to one-off factors, most measures were either stable or edged down in June,” it said.
The ECB voted to lower interest rates for the first time in five years last month, but policymakers were reluctant to give any further guidance on the future path of interest rates.
Rate-setters are cautious about loosening monetary policy too quickly and potentially causing a resurgence in inflation. Figures out this out earlier this month showed that inflation in the eurozone eased to 2.5 per cent, in line with expectations, but services inflation remained at 4.1 per cent.
“Domestic price pressures are still high, services inflation is elevated and headline inflation is likely to remain above the target well into next year,” the ECB said.
Services inflation has become a particularly important gauge of domestic inflationary dynamics for central banks in advanced economies all over the world.
Wage growth has also remained too high for comfort with some anecdotal evidence suggesting that the anticipated slowdown might take longer to materialise than expected. However, the ECB noted that the inflationary impact of higher wages had been “buffered” by profits.
Markets expect at least one more rate cut from the ECB before the end of the year. The timing remains uncertain, although many economists think another cut in September is likely.
Mark Wall, chief European economist at Deutsche Bank, argued that the ECB was still “on course” for a September cut. “Despite some recent inflation data being less friendly, the ECB has excused some as one-offs and others as absorbed in profit margins,” he said.
Hussain Mehdi, a director at HSBC Asset Management, said that the chances of a September cut were “pretty high”.
He noted that the US Federal Reserve was also likely to start cutting rates in September, which would limit the potential downside pressure on the euro.
As set out in its last meeting, the ECB committed to follow a “data-dependent and meeting-by-meeting approach” based on the incoming figures.
“The Governing Council is not pre-committing to a particular rate path,” the ECB said.