The European Central Bank kept interest rates on hold as expected on Thursday, insisting that domestic price pressures remain high and inflation will remain above its target over next year, but did not hint at its next move.
The ECB cut its record benchmark interest rate last month after efforts to bring inflation down to its 2 percent target faltered, but even some policymakers felt the move was too hasty. With domestic inflation still high and wage growth sluggish, the ECB is likely to be more cautious about any further steps.
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The ECB delivered a balanced message after meeting on Thursday, arguing that while corporate profits are absorbing some upward pressure on prices, risks remain and policymakers need more evidence before pulling the trigger again.
“The information received broadly supports the Governing Council's previous assessment of the medium-term inflation outlook,” the ECB said.
“Domestic price pressures remain strong, services inflation has picked up and headline inflation is expected to remain above our target next year,” the ECB said in a statement.
ECB President Christine Lagarde has already hinted at this outcome in recent weeks and focus has now shifted to the September meeting, with investors likely to scrutinise her comments at her press conference at 12:45 GMT for clues.
For now, the ECB has reiterated that it is not willing to commit in advance to a particular interest rate path, and that a decision will be made based on upcoming data.
The ECB added that “the Governing Council will continue to adopt an data-driven approach to decide on the appropriate level and duration of restrictions at each meeting.”
Markets are pricing in nearly two rate cuts this year and more than five by the end of next year, and no policy maker has openly challenged that view in recent weeks.
Investors will be looking for stronger guidance, but the euro zone's 20-nation central bank has burned itself many times in the past by getting overly specific about future moves.
The Fed had promised a rate cut in June months ago, but a series of last-minute data points to rising wage and price pressures, causing economists and some policymakers to question the merits of a rate cut.
Another issue is that the Sept. 12 policy meeting is unusually far away, with a wealth of economic data to be released before policymakers meet again.
Quarterly data on growth, wages and productivity are all due by September, plus two monthly inflation measures, while the ECB is due to publish its own new inflation and growth forecasts at the meeting.
This suggests that policymakers are unlikely to solidify their views on the September meeting until the last week of August at the earliest.
Sticky Service Costs
The ECB's main concern is that while domestic prices, especially services prices, tend to remain stable, relatively rapid wage growth could lead to inflation continuing to exceed the ECB's target.
Multi-year wage agreements already in place suggest wage pressures will ease later this year, suggesting that more moderate figures should ultimately be realised.
The economy also remains relatively weak, with a series of surveys pointing to sluggish growth, but concerns are easing that a summer boom in tourism in particular could put further pressure on prices.
But much of this remains merely hope, and there have been few hard indicators since the June 6 rate cut that any predictions are coming to fruition.
And some argue that even as interest rates continue to ease, the ECB is downplaying the risks to its central scenario of getting inflation back to its 2% target by the end of 2025.
Another uncertainty is how quickly the Federal Reserve will cut interest rates.
Although the ECB's policy is technically independent, it is difficult for it to stray too far from the world's largest central bank.
Higher U.S. interest rates would encourage investors to move funds to the United States, weakening the euro and accelerating imported inflation.
Markets currently expect the Fed to cut rates in September with a second cut before the end of the year, a timeline that would support two more rate cuts by the ECB.
The ECB will announce its policy decision at 12:15 GMT, followed by a press conference from Lagarde at 12:45 GMT.
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