The European Central Bank (ECB) could keep interest rates steady for more than one monetary policy meeting following its recent quarter-point reduction in deposit rates. ECB president Christine Lagarde stated that interest rates will not decrease in a linear fashion, emphasizing that the bank is not following a predetermined path. Lagarde suggested that rates may remain unchanged for more than one meeting depending on labor cost developments and earnings absorption. This indicates that the ECB may not lower rates at its upcoming meeting on July 18 due to new data on Eurozone wages not being available until after that date.
Despite the ECB cutting rates before the US Federal Reserve and the Bank of England, the Eurozone economy is recovering, inflation is rising, and wages are increasing at a record pace. This has led to analysts speculating that the ECB may adopt a cautious and gradual policy approach in the coming months. Lagarde acknowledged that recent data could have been better but defended the rate cut as appropriate, stating that the disinflation process was advanced. The ECB aims to maintain rates at a level that restricts demand among businesses and consumers until inflation reaches its 2 percent target, which is not expected until late next year.
Lagarde expressed concern about rising labor costs, higher company profits, and declining worker productivity leading to increased price pressures, describing these as the ECB’s weak points. She emphasized the need for data in these areas to move in the right direction to continue tightening monetary policy until inflation reaches the target. Lagarde’s comments suggest that the ECB will maintain a cautious approach to rate cuts and focus on inflation reaching the desired level. The ECB’s decision to cut rates and maintain a tightening monetary policy cycle reflects their commitment to achieving their inflation target.
The US Federal Reserve, expected to hold interest rates steady due to sticky inflation, and the Bank of England, likely to do the same in their upcoming meetings, indicate a trend towards cautious monetary policy among central banks. Investors have adjusted their expectations for the scale and pace of ECB rate cuts following last week’s meeting, with several rate-setting council members advocating for a gradual policy approach. Eurozone inflation has increased from an almost two-year low to 2.6 percent in May, prompting the ECB to raise its inflation forecasts for the next two years, showing signs of a recovering economy.
Lagarde’s remarks emphasize the need for a data-driven approach to monetary policy, with a focus on labor costs, company profits, and worker productivity. The ECB aims to continue tightening policy until inflation reaches the target of 2 percent, aiming for a cautious and gradual approach based on economic indicators. Lagarde’s comments suggest that the ECB will closely monitor economic developments and adjust policy accordingly, reflecting a commitment to achieving their inflation target. The ECB’s decision to cut rates reflects broader trends in central bank policy, with a focus on cautious and data-driven approaches to monetary policy.
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