The ECB Leaves Interest Rates Unchanged
Today the ECB (European Central Bank) held interest rates steady with the key deposit rate* holding at 2%. To date, the ECB has cut interest rates eight times since June 2024 and President Christine Lagarde advised that the economy was now in a good place and growth is in line with projections or perhaps a little better. The president went on to say that having left interest rates unchanged that the ECB was now in a “wait and see mode” with the ECB shunning calls to reduce the cost of borrowing.
*Key Deposit Rate – The European Central Bank’s (ECB) key deposit rate is currently 2.00%. This rate is the interest banks receive when they deposit money with the central bank overnight. The ECB also sets other key interest rates, including the main refinancing rate (2.15%) and the marginal lending facility rate (2.40%). These rates are used to influence borrowing costs and economic activity in the Eurozone.
President Lagarde as advised above confirmed that the economy is growing in line with expectations however, she reminded the markets of the risks with the economy tilted towards the downside and said,” higher actual and expected tariffs, the strong euro and persistent geopolitical uncertainty are making firms more hesitant to invest”. She went on to say that “Wage increases are coming down and as growth has been developing in a relatively favourable way means we are now confident that the inflation shock of the last few years is behind us and our job is to look at what’s coming”.
The Vice President of the ECB Luis de Guindos, (previously Spain’s Minister of Economy, Industry and Competitiveness 2011 – 2018) warned growth will be almost
flat in Q2 and Q3 due to businesses front-loading to sidestep higher levies. Analysts and traders in the financial markets are betting that there will be one more rate cut before the end of the year with recent data released suggesting that a number of economists favour a rate cut at the next meeting on 11th/12th September. However, an executive member of the board Isabel Schnabel confirmed that the eurozone’s 20 nation economy is resilient and advised that the bar of another rate cut is very high.
Despite the comments Schnabel financial market experts advise that the decision to hold rates could be breather before steeper cuts than currently predicted in order to prevent the eurozone’s economy from stalling and to block a period of deflation*. Indeed, the threat of deflation is in the air due to disinflation* being rampant across the eurozone, plus intensifying Chinese competition and the ongoing threat of tariffs from President Donald Trump and his administration. As President Lagarde mused, we certainly will have to “wait and see”.
*Difference Between Disinflation and Deflation – Disinflation refers to a decrease in the rate of inflation, meaning prices are still rising, but at a slower pace. Deflation, on the other hand, is a sustained decrease in the general price level of goods and services, meaning prices are actually falling.
