European Central Bank keeps interest rates unchanged
The European Central Bank (ECB) keeps interest rates constant in the Eurozone. The benchmark interest rate, to which banks can borrow money from the central bank, remains at 4.25%. The deposit rate, which banks receive for parked funds, is unchanged at 3.75%.
The European Central Bank maintains interest rates in the Eurozone despite the recently decreased inflation. The ECB, following its latest rate cut in June, has not yet decided to further ease its monetary policy. The benchmark interest rate, to which banks can borrow money from the central bank, remains at 4.25%. The deposit rate, which banks receive for parked funds at the central bank, is unchanged at 3.75%.
The bank will continue to act data-dependently and make decisions on a meeting-by-meeting basis, as stated by the central bank, which referred to the still high price pressure. Regarding further interest rate cuts, ECB President Christine Lagarde recently expressed caution: "A strong labor market means we can take our time to collect new information," she said at the ECB forum in Portugal regarding unemployment in the Eurozone.
Unemployment stood at a record low of 6.4% in May. However, it's important to note that growth prospects remain uncertain, as Lagarde pointed out. The economy in the Eurozone only grew by a slight 0.3% in the first quarter compared to the previous quarter.
The German central bank also advocated for a cautious approach. "We're not lowering interest rates on autopilot," Bundesbank President Joachim Nagel recently told the "Tagesspiegel."
ECB in no rush for interest rate change
To combat the record-high inflation caused by the Russian aggression against Ukraine, the ECB raised interest rates ten times in a row since July 2022 before taking a pause. In June, the ECB then lowered the benchmark interest rates for the first time since the inflation wave by 0.25 percentage points.
The central bank must balance its monetary policy: high interest rates make credit more expensive, which can dampen overall economic demand and counteract high inflation rates. However, cheaper financing is also a burden for the economy and individuals seeking loans, such as homebuilders. If the ECB lowers interest rates too quickly, it risks attracting inflation once again.
Inflation remains stubborn
Recently, inflation in the Eurozone has shown signs of abating. The inflation rate fell to 2.5% in June, down from 2.6% in May. The inflation rate is approaching the ECB's medium-term goal of an annual rate of 2%. At this level, inflation watchers see price stability maintained.
Higher inflation rates erode consumer purchasing power - they can buy less for a Euro. With the faltering economy and decreasing inflation, there are frequent calls for the ECB to lower interest rates.
However, the decline in inflation in the Eurozone is slow. Economists are concerned that inflation, excluding volatile prices for energy and food, remained stable at 2.9% in June. This "core inflation" is considered a more reliable indicator of inflation by economists. Some economists predict a rate cut in September. Then, the ECB will decide on the benchmark interest rates once again.
The EZB's deliberate approach to interest rate decisions is influenced by its need for balanced financial regulation. lowered interest rates could stimulate economic growth, but they might also contribute to higher inflation.
Despite the political pressure for rate cuts due to decreasing inflation and uncertain growth prospects, the ECB, under the guidance of President Lagarde, has shown caution, citing the need to gather more data before making any changes.
