The ECB maintained its benchmark deposit rate at 3.75%, after cutting it from an all-time high of 4% in June. The interest rate on its main refinancing operations also stayed at 4.25%, while the rate of its marginal lending facility remained at 4.50%.
The lack of movement this month had been largely telegraphed, with numerous officials arguing that price pressures are coming down as expected but risks remain, so more data is needed before another cut becomes a reality.
Markets are pricing in almost two rate cuts over the rest of the year, with the September meeting the current favorite to see the next move.
The ECB’s key concern is that domestic prices, particularly for services, are moving sideways and relatively quick wage growth threatens to perpetuate inflation above its 2% medium-term target.
That said, the economy remains relatively weak, with a string of surveys pointing to anaemic growth, easing fears of future price pressures.
The July statement is non-committal on whether the ECB will follow up its first cut in June with a second in September, said analysts at Evercore ISI, in a note, stating the “Governing Council is not pre-committing to a particular rate path.”
However, “it is more dovish / less hawkish than many feared given recent sticky services inflation”, adding that incoming information “broadly supports” its previous assessment of the medium term outlook, most measures of underlying inflation “were either stable or edged down in June”, the pressure from wages is being “buffered by profits” in line with ECB expectations and policy is “keeping financing conditions restrictive” – though domestic price pressures are “still high” and services inflation is “elevated” with headline inflation likely to remain above target until “well into next year.”
“We read the update as consistent with our call that the ECB is still on track to cut in September in spite of unease about sticky services inflation,” Evercore added.
The focus will now turn to ECB President Christine Lagarde’s accompanying press conference for more clues surrounding the central bank’s future intentions.
Source: Economy - investing.com
