European Central Bank keeps interest rate at 3.75%

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The European Central Bank kept its key interest rate at 3.75 percent, with its president Christine Lagarde saying a decision on a possible cut in September was “wide open” but downplaying concerns about persistent price pressures.

The European Central Bank’s Governing Council’s decision to keep its benchmark deposit rate unchanged was in line with market expectations, amid concerns that geopolitical uncertainty and rapid wage increases could continue to push prices higher.

“What we will do in September is wide open and will be determined on the basis of all the data we will receive,” Lagarde said at a news conference after Thursday’s decision.

The governing council, which cut interest rates in June from a record high of 4%, agreed that it would not provide guidance on future interest rate decisions, she added.

The euro then fell against the dollar, falling 0.3 percent to $1.0905 by mid-afternoon.

The European Central Bank said it wanted more evidence that inflation, which slowed to 2.5 percent in June after peaking at 10.6 percent in 2022, is still on track to fall to its 2 percent target by the end of next year.

Recent data “broadly support” such a scenario, she said on Thursday, downplaying signs that services price inflation could remain elevated.

“While some measures of core inflation rose in May due to one-time factors, most measures were either flat or declined in June,” the Governing Council said.

The eurozone is facing wage growth of 5%, as workers demand compensation for the worst wave of inflation in a generation.

But Lagarde said the recent wage increases were “not a surprise,” and that wages were expected to rise more slowly over 2025 and 2026. “That’s the direction things are heading,” she said.

Although inflation in the eurozone is on a “disinflationary path,” the ECB still needs to keep interest rates high. “We will remain in the constraint zone as long as it takes to reach the target, and we are not there yet,” Lagarde said.

The eurozone economy is expected to grow at a “slower pace” in the second quarter compared with a 0.3% expansion in the first three months of the year, she added, and risks to growth are “skewed to the downside.”

Swap traders priced a 65% chance of a rate cut in September, compared with 73% just before the decision.

Dirk Schumacher, a former ECB economist who is now at French bank Natixis, said Lagarde’s reluctance to clearly indicate her next move was “the prudent thing to do, given the uncertainty and the very early commitment in June.”

Many members of the Fed were uneasy about how clearly the signal for a rate cut in June had been made, leaving them little choice but to go ahead despite some unwelcome signals from economic data.

Interest rate setters are also concerned about political turmoil, especially after this month’s inconclusive election result in France raised doubts about whether the new, high-spending government in the region’s second-largest economy will push inflation higher.

Lagarde stressed that all eurozone countries will need to abide by the EU’s new fiscal rules, which require countries with high debt levels such as France and Italy to reduce them by reducing their budget deficits to 3% over time.

“These are the set of rules that need to be implemented and respected,” she said.

The European Central Bank’s president said she would begin an evaluation “soon” of the new strategy she set out two years ago and present the results next year. She added that the bank would not consider any changes to the 2% target or the idea of ​​publishing individual policymakers’ interest rate forecasts in a “dot plot” similar to the US Federal Reserve’s.

Additional reporting by Mary McDougall in London