The ECB left rates unchanged in July, maintaining a data-dependent approach, with September’s rate cut still undecided. Lagarde noted high domestic price pressures still weighing on inflation and potential tariffs risks weighing on exports.
The European Central Bank (ECB) has decided to keep its key interest rates unchanged at its July meeting, as widely anticipated, leaving financial markets without clear guidance on whether another rate cut will occur in September.
The ECB maintained the deposit rate at 3.75%, the refinancing rate at 4.25%, and the marginal lending rate at 4.50%. This decision follows a 0.25% cut across all three rates in June, marking the first reduction since 2019.
The July statement reiterated that policymakers are “not pre-committing to a particular rate path,” a stance that President Christine Lagarde underscored at the press conference.
Lagarde noted that the decision was unanimous, and the consensus was to adhere to a data-dependent and meeting-by-meeting approach.
September rate cut is not set in stone
“What we do in September is wide open,” she stated.
Lagarde indicated that additional data is necessary to confirm the ongoing disinflationary trend and to bolster the ECB’s confidence.
She cautioned that domestic price pressures remain high and that the relationships between wages, profits, and productivity add uncertainty.
“Inflation could turn out higher than anticipated if wages or profits increase more than expected,” she said.
Lagarde also highlighted that heightened geopolitical tensions pose upside risks to inflation by potentially driving up energy prices and freight costs, and disrupting global trade. Extreme climate events could also affect food prices.
On the economic recovery, she emphasised the significant role of the services sector, driven by high employment and increased consumption of services. “The service PMI remains very expansionary, but this is not the case for manufacturing.”
Investment remains weak due to tight financing conditions and corporate uncertainty.
“Between now and September, we will be receiving a lot of information,” she said, adding, “I’m afraid it is going to be a busy summer.”
She reiterated that the ECB will maintain a restrictive policy stance as long as necessary to achieve the 2% inflation target.
“The inflation target will not be debated. It can be debated in the future by a future President of the ECB, but not on my watch,” she responded to questions on whether the ECB would review its strategy framework this summer.
In response to questions about economic risks from potential higher US trade tariffs under a possible Trump administration, Lagarde emphasised the importance of exports to Europe’s economic recovery.
She stressed the significance of trade policies, noting that internal discussions within the Governing Council will address risks related to segmentation, fragmentation, and potential tariff increases.
Lagarde also highlighted the importance of national fiscal and structural policies in enhancing productivity and competitiveness. “An effective, speedy, and full implementation of the NextGenerationEU programme, progress towards Capital Markets Union, and the completion of Banking Union are key factors that would help foster innovation and boost investment in the green and digital transitions,” she said.
Market reactions
Despite the ECB’s decision to refrain from hinting at a September rate cut, as market participants broadly predicted, the euro weakened following Lagarde’s remarks, with the euro-dollar exchange rate falling 0.3% to 1.0910.
European stocks slightly trimmed session gains, with the Euro STOXX 50 index inching up 0.5% at 4 p.m. CET. Essilor, Telefonica, and Mercedes-Benz AG were the top gainers, rising 3.4%, 2.4%, and 2%, respectively.
The Paris CAC 40 was the top performer among major European indices, climbing 0.8%.
Teleperformance SE and Publicis led the daily gains within the CAC 40, increasing by 4.7% and 4.2%, respectively.
Short-dated eurozone bond yields softened, with the 2-year Schatz down 4 basis points to 2.75%. The Bund yield eased to 2.40%.
