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The European Central Bank (ECB) maintained its current interest rates at its July meeting, but minutes from the July 17-18 Monetary Policy Committee (MPC) meeting, released on August 22, suggest that rate cuts could be on the horizon later this year.
The ECB’s decision to hold rates steady comes as it faces growing discussions about the timing of potential rate reductions. While market participants are anticipating “almost two additional 25 basis point cuts by the end of the year,” the Governing Council indicated that there was “almost no probability” of a rate cut at the July meeting.
The central bank emphasized its data-dependent approach and noted that the September meeting might be a critical point for reassessing monetary policy. This implies that rate cuts could be considered as early as the next policy meeting, depending on the economic data received.
The euro area economy continued to expand in the second quarter, though at a slower pace compared to the first quarter. Services are leading the recovery, while the manufacturing sector remains sluggish. The ECB expects consumption to support growth due to rising real incomes, despite ongoing inflationary pressures.
According to the minutes, “The incoming information indicated that the euro area economy had grown in the second quarter, but likely at a slower pace than in the first quarter.”
Headline inflation eased to 2.5% in June, but services inflation remains elevated at 4.1%. The ECB projects that inflation will fluctuate around current levels for the rest of 2024 before declining towards the 2% target in the latter half of 2025.
The Governing Council acknowledged, “Domestic price pressures were still high, services inflation was elevated, and headline inflation was likely to remain above the target well into 2025.”
The ECB decided to keep its key interest rates unchanged, maintaining a restrictive policy stance to ensure a return to the 2% inflation target. The Governing Council reiterated its commitment to a flexible, data-driven approach, underscoring the need for adaptability in an uncertain economic environment.
“Members emphasized that they remained determined to ensure inflation would return to the 2% medium-term target in a timely manner and that they would keep policy rates sufficiently restrictive for as long as necessary to achieve this aim,” the minutes stated.
The upcoming September meeting will be pivotal, with new data and projections expected to influence the ECB’s next steps. Attention will focus on Q2 figures for wages, profits, and productivity, as well as inflation data for July and August.
Market reaction to the ECB’s decision was subdued, with investors likely awaiting clearer signals from the September meeting before making significant moves. As the ECB balances inflation control with economic growth support, the potential for rate cuts later in the year adds an element of anticipation to the euro area’s economic outlook for the remainder of 2024.
