Danger of inflation

ECB leaves interest rates unchanged before the summer break

The key interest rate will remain at 4.25 percent for the time being.

(Bild: studio v-zwoelf - stock.adobe.com)

The European Central Bank (ECB) is keeping its feet still before the summer break and is therefore not making any changes to interest rates - the fear of excessive inflation is too great.

Inflation in the services sector, which is proving to be very persistent, is a major concern for the euro central bank: in June, as in May, it was 4.1 percent. ECB President Lagarde warned at the beginning of the month that it would take some time for the ECB to collect enough data to be sure that the danger of excessive inflation had been averted.

At the ECB Governing Council meeting in Frankfurt on Thursday, the monetary watchdogs led by central bank president Christine Lagarde decided to leave the key interest rate at 4.25 percent. The deposit rate on the financial market, which banks receive for parking surplus funds, remains at 3.75 percent.

Interest rate turnaround in June
The ECB completed the interest rate turnaround in June and loosened the interest rate screw for the first time since 2019. The ECB Governing Council will continue to determine the appropriate level and duration of the restrictive level depending on the data situation and on a meeting-by-meeting basis, the ECB explained: "The Governing Council does not commit itself in advance to a specific interest rate path."

Economists had expected a pause in interest rates. It is true that inflation in the 20-country community fell to 2.5 percent in June. It is therefore no longer far off the ECB's target of 2.0 percent, which it is aiming for as the optimum level for the economy.

Wage growth drives inflation
However, wage growth, one of the most important drivers of inflation in the eurozone, was still strong recently. In the first quarter, collectively agreed wages in the eurozone had risen by 4.7 percent. However, according to ECB chief economist Philip Lane, the latest company news now points to a slowdown in wage growth.

According to a survey conducted by the Reuters news agency last week, economists expect the ECB to cut interest rates twice more this year. The economists expect steps downwards of a quarter of a percentage point each time at the interest rate meetings in September and December.