European Central Bank President Christine Lagarde at a press conference on the interest rate decision in Frankfurt, Germany, on March 7, 2024.
Bloomberg | Bloomberg | Getty Images
Frankfurt—— European Central Bank Rates are set to remain steady this week after cutting rates in June for the first time since September 2019.
The backdrop for keeping interest rates unchanged is uncertainty about underlying inflation dynamics, especially in the labor market, which has put pressure on the central bank’s determination to cut interest rates quickly.
“ECB spokespersons, including President (Christina) Lagarde and chief economist (Philippe) Ryan, have made clear that the July meeting will be more of a stock-taking exercise than a policy decision-making meeting, and Take into account the forecast of no new hires,” Societe Generale’s Anatoly Annankov said in a recent research note.
“In the absence of new quarterly data, such as gross domestic product, wages and labor productivity data, the (ECB) Governing Council will have to rely mostly on survey data,” he said, adding that previous data pointed to the euro’s recovery The road is rocky.
The purchasing managers’ index in early July showed that the manufacturing industry was back in contraction. In addition, Germany’s widely watched ZEW index fell more than expected as the business outlook deteriorated.
However, while the economic trajectory appears uncertain and biased to the downside, inflation remains unclear. Recent inflation data has shown that overall inflation has declined, but wage growth remains a serious headache for the European Central Bank.
ECB President Dirk Schumacher said: “With deflation driven by falling energy prices and normalizing supply chains now largely over, wage growth has now become a major stumbling block to the ECB’s 2% inflation target.” ECB Observer at Natixis said in a recent research note to clients.
We are in uncharted territory for the ECB, as it needs to set policy amid heightened uncertainty about geopolitics and specific political aspects such as the French election results and the upcoming US vote.
“We still expect headline inflation to be close to target in September and October, suggesting that a rate cut in September may be well-timed. Beyond that, the picture is less clear. The ECB wants to see significant wage growth by the end of the year Slow down,” Annankov said.
