European Central Bank holds interest rates, says domestic price pressures ‘still high’

The European Central Bank left interest rates unchanged on Thursday, after implementing a cut in June.

“Monetary policy is keeping financing conditions restrictive. At the same time, domestic price pressures are still high, services inflation is elevated and headline inflation is likely to remain above the target well into next year,” the ECB’s Governing Council said in a statement.

The decision — which keeps the key interest rate at 3.75% — was widely expected amid ongoing concern over inflationary pressures, particularly from the labor market.

Euro zone headline inflation dipped to 2.5% in June from 2.6% previously, but the core print — excluding the volatile components of energy and food — came in above a consensus forecast, holding steady at 2.9%.

Analysts expected the central bank to wait for more data across wages, economic growth and productivity before easing monetary policy further.

The ECB cited the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission as the reasons behind trimming rates in June — in the bank’s first such cut since 2019.

In the July meeting statement released Thursday, the Governing Council said it would continue to monitor those areas, and that it was “not pre-committing to a particular rate path.”

However, market pricing suggests firm expectations for two more 25 basis point cuts this year, in September and December, with a pause during the central bank’s October meeting.

Expectations for a rate hold in July meant European markets were little changed following the decision, with the euro continuing to trade slightly lower against the U.S. dollar and higher against the British pound. Stocks were broadly higher across the region.

The Thursday statement shows that the ECB remains on course for a September rate cut, Mark Wall, chief European economist at Deutsche Bank Research, said in a note.

“Despite some recent inflation data being less friendly, the ECB has excused some as one-offs and others as absorbed in profit margins. The ECB is taking comfort from the trends and looking through the noise, consistent with being ‘data dependent, not data point dependent’,” Wall said.

“The ECB is still very much open to cutting interest rates in September, we think that’s quite likely… we think now’s the time to be shifting cash and locking in current interest rates before they come down,” Kiran Ganesh, Chief Investment Officer at UBS Global Wealth Management, told CNBC’s Silvia Amaro after the decision.

“When it comes to the euro, both the euro and the dollar may be on quite similar interest rate paths from here, so we suggest looking towards currencies that perhaps are closer to the end of their rate-cutting cycles, like Switzerland, where we expect only one further interest rate cut,” he added.

While the ECB started taking rates lower before the U.S. Federal Reserve, investors now largely expect the U.S. central bank to start cutting in September and to trim rates three times by January 2025.

Switzerland, Sweden and Canada have all cut rates already this year, but sticky U.K. inflation data this week reduced market bets on an August rate cut from the Bank of England, boosting the British pound on Wednesday.