ECB Holds Interest Rates Steady... Lagarde Says September Cut "Wide Open" (Comprehensive)

Market Expects Further Price Cuts Following September Reduction

Last month, the European Central Bank (ECB) cut interest rates for the first time in about two years, and this time it kept rates unchanged. ECB President Christine Lagarde hinted at a possible rate cut in September, saying the possibility of a rate cut at the next meeting is "wide open."

On the 18th (local time), the ECB held a monetary policy meeting at its headquarters in Frankfurt, Germany, and announced that it had kept the key interest rate at 4.25% per annum, the deposit rate at 3.75% per annum, and the marginal lending rate at 4.50% per annum.

Christine Lagarde, President of the ECB
Photo by AFP Yonhap News

Accordingly, the interest rate gap between the Eurozone (20 countries using the euro) and South Korea (key interest rate 3.50%) remained at 0.75 percentage points, and the gap with the United States (key interest rate 5.25~5.50%) was maintained at 1.00~1.25 percentage points.

In its monetary policy statement, the ECB said, "Domestic price pressures remain high, service prices are rising, and headline inflation (consumer price index) is likely to remain well above the target next year." It added, "Core consumer prices (excluding energy and food) rose temporarily in May due to transitory factors, but in June most were stable or declining," and "New incoming information broadly supports the previous meeting’s assessment of the medium-term inflation outlook."

The ECB cut policy rates by 0.25 percentage points each on June 6 last month. However, at that time, it revised upward its inflation and economic growth forecasts for this year, suggesting that additional rate cuts might take longer than expected.

The Eurozone’s consumer prices in June, announced the day before, rose 2.5% year-on-year, still exceeding the target of 2.0%. In particular, the service sector, which the ECB closely monitors, increased by 4.1%. However, the ECB described the service sector increase as a "one-off factor" and expects the inflation rate to reach the target in the second half of next year.

At the press conference that day, President Lagarde said that they have been closely examining wage growth, corporate profit margins, and productivity, adding, "In the coming weeks and months, there will be much more of this data." She continued, "If that data actually confirms the ongoing disinflation process, our confidence that inflation will return to the 2% target by the end of 2025 will be further strengthened."

Lagarde also said, "What we will do in September is wide open," and "We will receive a lot of data from now until September." Bloomberg News explained that this was a phrase Lagarde repeatedly emphasized ahead of the June rate cut.

Accordingly, major foreign media and markets are placing weight on the ECB making a second rate cut in September.

Stefan Gerlach, Chief Economist at EFG Bank, said, "The ECB is trying to balance sticky inflation and wage increase concerns. Political uncertainty in France is also not helpful," but added, "If the economy weakens, inflation will slow, and the background for lower rates will be set. Since the U.S. Federal Reserve (Fed) is likely to cut rates in September, the ECB will likely do the same." He also added, "I expect additional cuts in December or January."

J?rg Kr?mer, Economist at Commerzbank, said, "As long as inflation data roughly points in the intended direction, a dovish-led ECB is likely to cut rates further at the September meeting," and predicted, "The next rate cuts will follow in December and March next year."

However, the ECB cautioned against excessive expectations, saying, "We have not committed in advance to a specific interest rate path," and "Our approach is to repeatedly review data at meetings." Bloomberg News cited anonymous sources saying there is skepticism within the ECB about whether even one rate cut will be possible this year.

Meanwhile, in response to a question about the impact of former U.S. President Donald Trump’s election victory on Europe, President Lagarde replied, "Considering the size of the U.S. financial market, economic developments in the U.S. are important to Europe, and the ECB will evaluate this very carefully."