European Central Financial institution maintains rates of interest as home value pressures are excessive

The President of the European Central Bank (ECB), Christine Lagarde, will attend a press conference following the monetary policy meeting of the Governing Council of the ECB in Frankfurt on 18 July 2024.

Jana Rodenbusch | Reuters

The European Central Bank left interest rates unchanged in a unanimous vote on Thursday after the historic cut in June, as it described the potential for a further cut in September as “completely open”.

“Monetary policy continues to keep financing conditions tight. At the same time, domestic price pressures remain high, services inflation is high and headline inflation is expected to remain above target well into next year,” the ECB Governing Council said in a statement.

Recent data largely supported the company's medium-term inflation forecast of 2%, it said.

The decision, which leaves the ECB's key interest rate at 3.75 percent, had been widely expected given ongoing concerns about inflationary pressures, particularly from the labor market.

Headline inflation in the euro area fell from 2.6% to 2.5% in June, but core inflation – excluding the volatile energy and food components – was above consensus forecast and remained stable at 2.9%.

Analysts expected the central bank to wait for further data on wages, economic growth and productivity before further easing its monetary policy.

“Wages are still rising at a high rate, offsetting the past period of high inflation. Higher nominal wages and weak productivity have contributed to a unique increase in labour costs, although this slowed somewhat in the first quarter of this year,” ECB President Christine Lagarde said during a press conference.

Lagarde said the central bank expects inflation to fluctuate for the rest of the year, but expects a general decline in the second half of the year due to lower labor costs, the impact of monetary policy and the fading impact of price shocks.

The ECB cited the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission as reasons for the interest rate cut in June – it was the bank's first such cut since 2019.

In the statement published on Thursday, the ECB Governing Council said it would continue to monitor these areas and “would not commit itself in advance to a particular interest rate path.”

However, market prices suggest that two more rate cuts of 25 basis points each are expected this year, in September and December, with a pause during the central bank meeting in October.

Lagarde confirmed during the press conference that the decision in July was unanimous – a change from June, when Austrian central bank chief Robert Holzmann was the only one against it and voted for a further hold rather than a rate cut.

“Equally unanimous was our determination to be data-dependent and to decide on a meeting-by-meeting basis,” she said in response to CNBC's Annette Weisbach, adding that the September decision was “completely open.”

Open to cuts

With interest rates unchanged in July, European markets saw little change following the decision. The euro remained slightly weaker against the US dollar and higher against the British pound. Equity prices across the region generally rose.

“The ECB is still very open to a rate cut in September and we think that is very likely. We think now is the right time to shift cash and lock in current rates before they fall further,” Kiran Ganesh, chief investment officer at UBS Global Wealth Management, told CNBC's Silvia Amaro after the decision.

“As for the euro, both the euro and the dollar could be on quite similar interest rate paths from now on. We therefore recommend looking at currencies that may be closer to the end of their rate-cutting cycles, such as Switzerland, where we expect only one more rate cut,” he added.

While the ECB began cutting interest rates before the US Federal Reserve, investors now largely expect the US Federal Reserve to begin cutting interest rates in September and cut interest rates three times by January 2025.

Switzerland, Sweden and Canada have already cut interest rates this year, but tough inflation data from the UK this week reduced market speculation of an August rate cut by the Bank of England, giving the British pound a boost on Wednesday.

Thursday's statement shows that the ECB remains on track for a rate cut in September, said Mark Wall, chief European economist at Deutsche Bank Research, in a statement.

“Although some of the recent inflation data has been less encouraging, the ECB has excused some of these as one-off events and dismissed others as being absorbed by profit margins. The ECB takes comfort in the trends and looks through the noise, which is consistent with its 'data dependent, not data point dependent' approach,” Wall said.