The European Central Bank (ECB) decided to keep its key interest rates unchanged at its meeting today, as was widely expected, without announcing details of future rate cuts.
ECB President Christine Lagarde stressed that “it is still too early to say what we will do in September,” but markets estimate there is an 80% chance that the ECB will cut interest rates by another 0.25 percentage points at its next meeting on September 12.
“The Governing Council today decided to keep the ECB's three key interest rates unchanged,” a press release said, with Lagarde adding later that the Governing Council's decision was unanimous.
“Newly available data broadly support our previous assessment of the medium-term inflation outlook. Although temporary factors led to some slight increases in some underlying inflation measures in May, most measures remained stable or declined slightly in June.”
“The ECB Governing Council does not commit in advance to a particular interest rate path,” it added.
The decision was widely expected and so reaction in stock, bond and currency markets was muted.
“Following the 0.25 percentage point cut in June, economists were not expecting any further rate changes this month,” said Michael Field, European equity strategist at Morningstar.
“Ultimately, current macroeconomic data does not call for further rate cuts, but nothing significant has changed in recent months, and especially since the June rate cut.
“This should be enough to convince central banks that the euro area economy was able to absorb a 25 basis point rate cut and therefore should be able to absorb further rate cuts, albeit at a more gradual pace.”
Analysts now expect two further rate cuts of 0.25 percentage points each, in September and December, are likely in 2024.
The inflation statement also remained balanced, Ulrike Kastens, Europe economist at DWS, wrote in an emailed note after the rate announcement. “In our view, the bank is awaiting further data, in particular a slowdown in wage growth, which could give it some leeway to further ease the tightness of monetary policy. We continue to expect the next rate cut to come in September,” she said.
Carsten Roemheld, capital markets strategist at Fidelity, also expects the ECB to cut rates in September. But what happens after that may be unclear, he told Morningstar by phone after the rate decision. He cited inflationary pressures and downside risks to economic growth from trade tensions, given that presidential candidate Donald Trump will announce additional tariffs if re-elected. Most of these will be targeted at Chinese goods, he said, but this will also ripple through the eurozone economy. In his view, the ECB's current reliance on meeting-to-meeting data is unprecedented and indicates a degree of uncertainty around politics, growth and inflation. He added that there is a plethora of macroeconomic data due to be released between now and the next meeting.
“A weakening global economy and intensifying trade tensions between major economies would weigh on euro area growth,” Lagarde told a news conference. The September meeting comes just before markets expect the U.S. Federal Reserve to start cutting interest rates.
At its last meeting on June 6, the bank made the following changes in interest rates:
• Main refinancing interest rate: Reduced from 4.50% to 4.25%.
• Interest rate on marginal lending facility: 4.50% instead of 4.75%.
• Deposit interest rates: reduced from 4.00% to 3.75%.
No new forecasts for inflation or growth are expected at the meeting. In its latest inflation outlook on June 6, the bank raised its projections for 2024 and 2025. Economists now expect average inflation to be 2.5% in 2024, 2.2% in 2025 and 1.9% in 2026. The ECB Governing Council is due to issue new forecasts at its next meeting on September 12.
Eurozone consumer prices rose 2.5% year-on-year in June, down from 2.6% in May but above the 2.4% increase economists had expected. Core inflation, which excludes energy and food costs, was 2.9%, the same as in May.
“The ECB has sent a clear signal that it wants to make interest rate decisions at its forecast meetings in September and December, rather than in July, October or January,” Konstantin Veit, executive vice president and portfolio manager at Pimco, told Morningstar on July 11.
“Inflation is not yet where the ECB would like it to be, but I think the ECB believes that deposit rates above 3% are still clearly subdued,” he added. Even if it cuts rates twice this year, the ECB will likely believe rates are still sufficiently subdued in the current inflation environment.
How will interest rate cuts affect savers and mortgage borrowers?
When interest rates are expected to fall, the stock market tends to rise. In the bond market, lower interest rates mean lower yields, which pushes up bond prices. Lower interest rates make yields more attractive on existing bonds, especially those that were already issued during a period of high interest rates.
At the same time, interest rates on deposits on bank accounts may decline, which will have a negative impact on savers, whose situation depends primarily on the deposit system, which is used to pay interest on bank deposits by the central bank.
Borrowers, meanwhile, benefit from lower interest rates as conditions for consumer loans and mortgages ease. In its latest economic report, the ECB said funding costs remained stagnant at subdued levels. Average interest rates for new business loans and new mortgages remained unchanged at 5.2% and 3.8% respectively in April compared to the previous month.