All Eyes on September as ECB Holds Interest Rates

“The
Governing
Council
decided
today
to
leave
the
ECB’s
three
key
interest
rates
unchanged,”
a
press
release
said.

“The
newly-available
data
largely
support
its
previous
assessment
of
the
medium-term
inflation
outlook.
Although
some
measures
of
underlying
inflation
rose
slightly
in
May
due
to
one-off
factors,
most
measures
remained
unchanged
or
fell
slightly
in
June.

“The
Governing
Council
of
the
ECB
does
not
commit
itself
in
advance
to
a
specific
interest
rate
path,”
it
added.

The
decision
was
widely
expected,
so
the
reaction
of
the
equity,
bond
and
currency
markets
was
muted.

“After
the
0.25
percentage
point
rate
cut
in
June,
economists
were
not
expecting
any
further
changes
to
policy
rates
this
month,”
says
Morningstar
european
equity
strategist
Michael
Field.

“Ultimately,
while
the
current
macroeconomic
data
is
not
screaming
for
further
rate
cuts,
it
has
not
changed
significantly
in
recent
months,
and
certainly
not
since
the
June
rate
cut.

“This
should
be
enough
to
convince
central
bankers
that
the
eurozone
economy
was
able
to
absorb
the
25
basis
point
rate
cut
and
should
therefore
be
able
to
absorb
further
rate
cuts,
albeit
at
a
moderate
pace.”

Analysts
now
assume
two
further
interest
rate
cuts
of
0.25
percentage
points
each
in
September
and
December
are
likely
for
2024.

At
its
previous
meeting
on
6
June,
the
Bank
had
made
the
following
changes
to
interest
rates:

•
Main
refinancing
rate: 4.25%,
reduced
from
4.50%;
•
Interest
rate
for
the
marginal
lending
facility:
4.50%,
instead
of
4.75%;
• Interest
rate
for
the
deposit
facility:
3.75%,
down
from
4.00%.

No
new
forecasts
for
inflation
or
growth
were
planned
for
this
meeting.
In
its
latest
inflation
outlook
on
6
June,
the
Bank
had
raised
its
forecasts
for
2024
and
2025.
Economists
expect
average
inflation
of
2.5%
in
2024,
2.2%
in
2025
and
1.9%
in
2026.
The
ECB
Governing
Council
will
present
new
forecasts
at
its
next
meeting
on
12
September.

In
June,
consumer
prices
in
the
eurozone
rose
by
2.5%
year-on-year,
down
from
2.6%
in
May
but
above
economists’
expectations
of
a
2.4%
increase.
At
2.9%,
core
inflation,
which
indicates
prices
excluding
energy
and
food
costs,
was
at
the
same
level
as
in
May.

“The
ECB
has
clearly
signalled
that
it
would
prefer
to
make
interest
rate
decisions
at
the
September
and
December
forecast
meetings
rather
than
in
July,
October
or
January,”
Konstantin
Veit,
executive
vice
president
and
portfolio
manager
at
Pimco,
told
Morningstar
on
11
July.

“Inflation
is
not
yet
where
the
ECB
would
like
it
to
be,
but
I
think
the
ECB
believes
that
a
deposit
rate
above
3%
is
still
clearly
restrictive,”
he
added.
Even
if
the
bank
were
to
cut
rates
twice
this
year,
it
would
still
consider
rates
sufficiently
restrictive
in
the
current
inflationary
environment.

How
Will
Rate
Cuts
Affect
Savers
and
Mortgages? 

Stock
markets
tend
to
rise
when
interest
rate
cuts
are
expected.
In
the
bond
markets,
falling
interest
rates
mean
lower
yields,
which
pushes
up
bond
prices.
Lower
interest
rates
also
make
existing
bonds,
especially
those
already
issued
in
times
of
high
interest
rates,
more
attractive
for
yield.

At
the
same
time,
interest
rates
on
savings
in
bank
accounts
are
likely
to
fall,
which
will
have
a
negative
impact
on
savers.
Savers’
conditions
are
primarily
dependent
on
the
deposit
facility –
as
this
is
used
to
pay
interest
on
bank
deposits
at
the
central
bank.

Borrowers,
on
the
other
hand,
benefit
from
the
lower
interest
rates
as
consumer
and
mortgage
loans
become
more
favourable.
In
its
latest
economic
report,
the
ECB
stated
financing
costs
are
stagnating
at
a
restrictive
level.
The
average
interest
rates
for
new
business
loans
and
new
mortgages
remained
unchanged
in
April
compared
to
the
previous
month
at
5.2%
and
3.8%,
respectively.

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