MercoPress. South Atlantic News Agency

European Central Bank leaves rate unchanged, waiting for September data

ECB president Christine Lagarde said 2024 would be a year of “muted growth, accompanied by heightened uncertainty,”

The European Central Bank (ECB) left its main interest rate unchanged at 3.75%, but president Christine Lagarde indicated that an interest rate cut is possible at its next meeting in September. However in her media conference following last Thursday announcement warned that risks to growth persist.

Ms. Lagarde, pointed out that domestic price pressures are still high, services inflation is elevated and headline inflation is likely to remain above the medium term target (2%) well into next year.

She said 2024 would be a year of “muted growth, accompanied by heightened uncertainty,” and played down the recent ‘stickiness’ of inflation, saying that it was mostly due to one-off factors.  

Eurozone government bond yields fell, especially shorter-dated ones which are more sensitive to the outlook for ECB rates. The yield on Italy’s benchmark two-year note hit a six-month low of 3.09 percent. 

Lagarde took two opportunities to flag risks to the export sector, traditionally an important engine of growth for the region.

ECB data shows Eurozone exports in the first quarter of this year were down over 4% from a year ago, against a backdrop of slowing demand in the U.S. and the long-term impacts on energy-intensive manufacturing from the loss of cheap Russian natural gas. 
 
President Lagarde also hinted at unhappiness with the way that China has grabbed market share from Europe as it has sought to export its way out of its own economic slump, caused by the deflation of a property bubble.

The Yuan has devalued by some 13% against the euro in the last two years, sharpening China’s competitive edge on world markets.

Exports are “a domain that we will also be looking very carefully at, to see how the numbers are faring going forward,” Lagarde said, with a close eye on “the competitive position of the European Union and the Euro area relative to other economic nations — in particular, China.”

Lagarde was also careful in not promising any fresh easing of monetary policy, when in June ECB implemented the Bank’s first interest rate cut since the pandemic. Instead, she stressed the Bank’s determination to keep “a data-dependent and meeting-by-meeting approach”, and said the outcome of its next meeting in September was “wide open” — even though financial markets are all but certain of a second quarter-point cut.

Last Thursday’s decision had been widely expected after the central bank cut interest rates from a record high in June. While analysts agree that the current level of interest rates is “restrictive, with the current deposit rate more than a full percentage point above current inflation”, they say that the ECB is able to err on the side of caution