The European Central Bank (ECB) left its key interest rate benchmark unchanged yesterday as its rate-setting council and ECB 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 percent, 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.
Photo: Alex Kraus, Bloomberg
Lagarde would not commit to a rate cut even at the Sept. 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 US tariffs on imports if former US 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 of the US Federal Reserve, which is expected to hold off lowering rates at its next meeting on July 30-31, though the Fed appears closer to cutting rates after that than is the ECB.
Inflation in the eurozone has fallen from a peak of 11.6 percent in October 2022 to 2.5 percent last month, slowly approaching the ECB’s goal of 2 percent considered best for the economy. But the last mile has been tough. Inflation figure has been stuck between 2 percent and 3 percent for months.
Workers have been negotiating higher wages to make up for lost purchasing power during the inflation spike and annual price increases remain too high at 4.1 percent last month in the crucial services sector.
Meanwhile, higher rates have slowed growth, which is in short supply in the eurozone, with GDP growing 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. Financing costs have also risen for renewable energy projects such as wind turbines, a key part of the EU’s effort to reduce greenhouse gas emissions.
However, the ECB can point to a strong jobs market with low unemployment as a sign that higher rates are not sending the economy into a recession.
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