European Central Bank Leaves Key Interest Rate at 3.75％, Waits for Signs Inflation is under Control

AP

16:19 JST, July 19, 2024

FRANKFURT, Germany (AP) — The European Central Bank left its key interest rate benchmark unchanged Thursday as its rate-setting council and President Christine Lagarde take their time to make sure stubborn inflation is firmly under control before lowering rates again.

The decision leaves the deposit rate at 3.75%, where it has stood after a single quarter-point cut rate at the previous meeting on June 6.

That means home buyers and businesses hoping for lower interest rates in Europe are going to have to wait at least until the bank’s September meeting for more affordable credit – and possibly even longer than that.

Lagarde would not commit to a rate cut even at the September 12 meeting, saying that “the question of September and what do we do in September, is wide open and will be determined on the basis of all the data that we will be receiving” ahead of the meeting.

Lagarde was asked at her post-decision news conference about the potential impact of higher U.S. tariffs on imports if former President Donald Trump returns as president in the November election. “I’m not going to speculate on political developments,”she said.

“Of course, we have to take into account the consequences of, for instance, the increase in tariffs or policies that are determined, outside of the euro area by any country with which we have either strong trade or financial links.” she said.

She added that “obviously, given the size of the US financial markets in particular, the developments taking place in the United States will be very carefully assessed to see what consequences it might have on the European Union and on the euro area in particular.”

The ECB’s stance for now resembles that that of the U.S. Federal Reserve, which is expected to hold off lowering rates at its next meeting July 30-31, though the Fed appears closer to cutting rates after that than is the ECB.

The ECB, Fed, Bank of England and other central banks around the developed world sharply raised rates to quell an outburst of inflation that followed Russia’s invasion of Ukraine and the end of the pandemic.

Higher rates make it more expensive to borrow money, spend and invest, cooling off demand for goods and, historically, the upward trend for consumer prices.

Inflation in the eurozone has fallen from a peak of 11.6% in October 2022 to 2.5% in June, slowly approaching the ECB’s goal of 2% considered best for the economy. But the last mile has been tough. Inflation figure has been stuck between 2% and 3% for months.

Workers have been negotiating higher wages to make up for lost purchasing power during the inflation spike and annual prices increases remain too high at 4.1% last month in the crucial services sector – a broad swath of the economy that includes movie tickets, restaurants, medical treatment, and haircuts.

Meanwhile higher rates have slowed growth, which is in short supply in the eurozone. Gross domestic product grew a tepid 0.3 in the first three months of the year after months of stagnation around zero.

The anti-inflation campaign has killed off a years-long rally in eurozone house prices, as mortgage costs weigh on home sales. Several eurozone countries including Spain and Ireland have large numbers of people with adjustable-rate mortgages who have faced sticker shock when looking at their monthly payments. Meanwhile financing costs have risen for renewable energy projects such as wind turbines, a key part of the EU’s effort to reduce greenhouse gas emissions.

The ECB can point however to a strong jobs market with low unemployment as a sign that higher rates are not sending the economy into a recession.

In the U.S., Fed Chair Jerome Powell said Monday that the Federal Reserve is becoming more convinced that inflation is headed back to its 2% target and said the Fed would cut rates before the pace of price increases actually reached that point. Recent figures, he said, “do add somewhat to confidence” that inflation is slowing sustainably. Annual inflation was 3.0% in June, down from 3.3% in May.

Most economists foresee at first cut occurring in September, and after Powell’s remarks Wall Street traders boosted their expectation that the Fed would reduce its key rate then from its 23-year high of 5.25%-5.5%. The futures markets expect additional rate cuts in November and December.