At the end of its monetary policy meeting in Frankfurt on Thursday 18 July, the Governing Council of the European Central Bank (ECB) cautiously decided to keep its three key rates unchanged since the first 25 basis points reduction in June (see EUROPE 13425/1).
The interest rate on the main refinancing operations therefore remains at 4.25%, the interest rates on the marginal lending facility at 4.50% and the deposit facility at 3.75%.
According to ECB President Christine Lagarde, this decision was taken by common accord of the Governing Council, as was the decision to apply its “meeting-by-meeting” decision-making method for future monetary policy decisions, based on data analysed using the three criteria of the reaction function (see EUROPE 13280/8) to determine the appropriate level and duration of the restrictive nature of monetary policy.
The President is looking forward to a “somewhat busy summer”.
Next decisions. As in June, the Governing Council is keen not to commit to any particular interest rate path in advance. However, Ms Lagarde pointed out that the question of September and what they will do then was wide open, as this will be determined by the data they will receive.
The June projections will be a reference point, but all the elements received will be taken into account, including the new macroeconomic projections and export data.
Growth will also be under the microscope. Ms Lagarde pointed to an improvement, driven in the euro area by services rather than production.
She also announced internal discussions on customs duties and the risk of fragmentation of world trade.
Without wanting to give any indication of future decisions, Ms Lagarde said that the ECB would remain in restrictive territory for as long as necessary to achieve its objective of limiting inflation to 2% in the medium term, given that the euro area has not yet reached this target, and it would take time to get to it.
The President also stressed the importance of implementing the new European economic governance framework and welcomed the European Commission’s orientation to strengthen the health of public finances and the Eurogroup’s declaration on the fiscal orientation for the euro area in 2025 (see EUROPE 13453/12).
Inflation and its components. Ms Lagarde pointed out that some measures of core inflation had risen in May in the euro area due to exceptional factors, but that most measures had remained stable or fallen slightly in June. She acknowledged that domestic inflation in the euro area remained high.
Salaries. Christine Lagarde stressed as well that wages in the euro area were continuing to rise at a sustained rate, making up for the recent period of high inflation. The rise in nominal wages, combined with weak productivity, has contributed to the growth in unit labour costs, she declared. The pace of growth slowed in the first quarter of 2024.
In the President’s view, growth in labour costs is also likely to remain high in the short term.
She also said that recent data on pay per employee had been in line with expectations and believed that recent survey indicators pointed to more moderate pay growth during 2025.
Profit margins. In addition, the President said that profits in the euro area had fallen in the first quarter of 2024, thereby also offsetting the inflationary effects of rising unit labour costs. In her view, survey data suggests that earnings should continue to be more moderate in the short term.
She said that inflation is expected to fluctuate around current levels in 2024, still shaken by base effects linked to the recent energy crisis, and that it could move closer to the 2% target in the second half of 2025.
Financing conditions. Ms Lagarde pointed out that business lending rates fell in May, but demand for credit from businesses was weak. On the other hand, mortgage rates remained stable, but for the first time since 2022, the Bank Lending Survey showed an increase in household demand.
Assessment of the ECB’s strategy. Finally, President Lagarde indicated that there would be no new ECB strategy, but rather an assessment of the existing strategy. Two elements were excluded from the discussion: the symmetrical medium-term inflation target of 2% and the dot plot forecasts. The exercise will start soon. Initial results could be available in the second half of 2025.
Link to decisions: https://aeur.eu/f/d2u (Original version in French by Émilie Vanderhulst)