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 (ECB) leaves interest rates unchanged in the Eurozone despite the recently decreased inflation. The ECB, following its latest interest rate decision in Frankfurt am Main, did not immediately opt for further easing of 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 decisions at the ECB monetary policy meeting were unanimous. This was stated by ECB President Christine Lagarde during the press conference following the interest rate decision in Frankfurt am Main. She did not comment on whether the ECB could further ease its monetary policy with another interest rate cut in September.
"We are not committed and will decide from meeting to meeting," Lagarde emphasized. "The question of September and what we do in September is still wide open," she added. This depends on the data. The data published in June will serve as a reference point.
Regarding her confidence in the expected inflation decline compared to June, she said: "If additional data confirms the ongoing disinflation process, it will strengthen our confidence."
Lagarde cautious on further interest rate cuts
ECB President Christine Lagarde has recently been cautious regarding further interest rate cuts: "A strong labor market means we can take our time to collect new information," she said at the ECB forum in Sintra, Portugal, regarding unemployment in the Eurozone.
Unemployment stood at a record low of 6.4% in May. However, it is essential to acknowledge that growth prospects remain uncertain, Lagarde noted. The economy in the Eurozone only grew by 0.3% in the first quarter compared to the previous quarter.
The Bundesbank also advocated for a cautious approach. "We don't cut interest rates on autopilot," Bundesbank President Joachim Nagel recently told the "Tagesspiegel."
ECB faces a balancing act
To curb the record-high inflation caused by the Russian aggression against Ukraine, the ECB had 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 navigate a delicate balance with its monetary policy: high interest rates make credit more expensive. This can dampen overall economic demand and counteract high inflation rates. Expensive financing is, however, a burden for the economy and individuals seeking loans, such as homebuilders. If the ECB lowers interest rates too quickly, it risks inflation returning.
Inflation remains stubborn
Recently, inflation in the Eurozone has eased. 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 target of an annual rate of 2%. At this level, price stability is maintained.
Higher price increases are eroding consumer purchasing power - they can afford one Euro less. In the face of a faltering economy and declining inflation, there are repeated calls for the ECB to lower interest rates.
However, the decline in inflation in the Eurozone is slow. Economists are concerned that the inflation rate, excluding volatile prices for energy and food, remained at 2.9% in June. This "core inflation" is considered more reliable by economists than the overall rate. Some economists predict a rate cut in September. Then the ECB will decide on interest rates again.
- Central Banks worldwide, including the ECB, play a critical role in setting interest rates to influence the economy and control inflation.
- The ECB's decision on interest rates impact purchasing power, as lower rates can make borrowing cheaper and stimulate spending.
- The ECB's Federal Bank, under the leadership of President Christine Lagarde, faces challenging decisions regarding monetary policy and interest rates due to the current economic situation.
- Foreign policy and geopolitical factors, such as the Russian aggression against Ukraine, have led to volatile energy and food prices, affecting the Eurozone's overall inflation rate.
- Financial Regulation plays a crucial role in determining how central banks like the ECB implement monetary policies and adjust interest rates in response to economic changes.
- Leitzins and other interest rate changes can impact various sectors, including homebuilding, where lower rates can make mortgages more affordable.
- The ECB's monetary policy must strike a balance between curbing inflation and supporting the economy, necessitating careful consideration of economic indicators such as unemployment and inflation rate trends.
