The European Central Bank (ECB) kept its 3 main policy rates unchanged in line with market expectations.
In the statement made by the ECB regarding the monetary policy decision, it was stated that the Bank left the refinancing rate at 4.25 percent, the deposit rate at 3.75 percent and the marginal funding rate at 4.50 percent.
Thus, at its fifth meeting of the year on monetary policy, the Bank made its first interest rate cut in 5 years on June 6, lowering the three main policy rates by 25 basis points and then leaving interest rates unchanged.
Referring to the increase in wages, the statement said that the information received largely supported the ECB Governing Council’s previous assessment of the medium-term inflation outlook.
It was stated in the statement that the monetary policy implemented by the ECB keeps financing conditions limited, that inflation in the service sector is increasing and that headline inflation is likely to remain above the target next year.
The ECB Governing Council’s renewed commitment to the medium-term inflation target of 2% was reported in the statement, which stated that the council would keep policy rates sufficiently restrictive for as long as necessary to achieve the target.
“The Governing Council will continue to follow a data-driven and meeting-by-meeting approach to determine the appropriate level and duration of tightening. In particular, interest rate decisions will be taken in light of incoming economic and financial data, the inflation outlook, the underlying dynamics of inflation and the strength of the transmission of monetary policy. The Governing Council does not commit in advance to a particular interest rate path,” the ECB said in a statement.
According to the statement, which emphasized that the ECB Governing Council will continue to follow a data-dependent approach to determine the appropriate level and duration of policy rate restrictions, the Bank will no longer repay the full principal payments of maturing securities purchased under the Pandemic Emergency Asset Purchase Programme (PEPP).
In addition, the bank will reduce its PEPP portfolio by 7.5 billion euros per month. At the end of this year, reinvestments will be stopped completely.
On the other hand, the annual inflation rate in the Eurozone, which was 2.6 percent in May, fell to 2.5 percent in June. The ECB aims for inflation to be 2 percent across the Eurozone for a healthy economy.
Economists expect annual inflation in the eurozone to approach the ECB’s 2% target over the summer.
SECOND INTEREST RATE CUT EXPECTED IN SEPTEMBER
Jessica Hinds, Director of the Economics Unit at Fitch Ratings, stated in her assessment of the issue that the ECB’s decision to keep interest rates unchanged at today’s meeting was taken considering the recent stickiness of price and wage inflation.
Hinds said the price and wage inflation data did not appear to have significantly changed the ECB’s assessment. “The bank attributed the recent increases in some key inflation measures to ‘one-off factors’. While today’s statement reiterated that all decisions will depend on the data, we expect the next rate cut to be in September. This expectation is supported by the recent assessments of some ECB officials.”
Deutsche Bank Europe Chief Economist Mark Wall also noted that the ECB remained “on course for a second interest rate cut” in September, adding, “The ECB, which remains data-dependent, has recently announced less positive inflation figures, although the bank is excusing some of them as one-offs and others as a decline in companies’ profit margins.”
