Eurozone rates kept on hold, as expected

But, following June's cut, resilient price pressures leave the ECB in a bind

18 July 2024

The European Central Bank (ECB) predictably left interest rates unchanged today, with markets generally feeling that strong real wages and economic growth would result in no further cuts this year following the last decision in June. Like most major central banks today, the ECB finds itself in a bind for specific reasons. Robust price pressure is making the decision to cut rates in early June look increasingly odd, exacerbated by the Governing Council’s statement today that it is not pre-committing to a particular rate path.

What was the point of June’s move in the first place? The stock answer is that the ECB will maintain its “data-dependent and meeting-by-meeting approach,” but it cannot literally keep moving rates on the back of the most recent data points. Instead, an assumed medium-to-long term path of inflation and rates seems more sensible. Even their medium-term trajectory of lower price pressure and rates is an intellectual struggle, with the ECB already conceding that headline inflation could remain above the target well into next year.

That is without getting into the politics, which matters too. While no central banker would admit to letting politics influence their course of action, developments in the US must surely add to the pressure to ease policy to mitigate threatened import tariffs on Europe coming into force in the event of a Republican win in November. Yesterday, former President Donald Trump proclaimed that “Europe sounds so lovely…but once you get past that, they treat us violently.” Therefore, a 10% across-the-board levy on imports from other countries, including those in Europe, is being openly touted. Recently appointed running mate JD Vance is also well known for his antipathy for US support for Ukraine and the adverse impact of globalisation on his rust-belt roots.

In such circumstances, and with many key European economies nursing enormous budget deficits that leave little fiscal policy room, it will be hard to argue against supportive rate cuts from the ECB in this potentially existential crisis. But all that is for the autumn, however. For now, the ECB will wind down for the European summer and hope for no nasty surprises.