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The European Central Bank has kept its main interest rate at 3.75 per cent, as it considers whether to cut rates in September despite concerns that geopolitical uncertainty and rapid wage rises will keep pushing up prices.
The ECB governing council’s decision to leave its benchmark deposit rate on hold was in line with market expectations.
But the central bank gave little indication of how likely it was to cut rates in coming months, saying that it was “not pre-committing to a particular rate path”.
It said monetary policy continued to restrict demand and higher wages were starting to be absorbed by reduced profit margins. But it noted that “domestic price pressures are still high, services inflation is elevated and headline inflation is likely to remain above the target well into next year”.
investors will be listening closely to ECB president Christine Lagarde’s press conference on Thursday for signals about future rate reductions after June’s initial quarter percentage point cut.
After Thursday’s rate announcement, the euro held steady, down 0.1 per cent against the dollar on the day at $1.0929.
Traders in swaps markets put the chances of a September rate cut at 65 per cent, down from 73 per cent immediately before the decision.
The ECB wants more evidence that inflation is on track to fall to its 2 per cent target by the end of next year.
Eurozone consumer price growth has slowed from a peak of 10.6 per cent in October 2022 to 2.5 per cent in June.
Rate-setters are also worried about political turmoil, especially after this month’s inconclusive election result in France raised doubts over whether a high-spending new government in the region’s second-largest economy would push up inflation.
In addition, there are concerns that a Donald Trump victory in November’s US presidential election could contribute to inflation in Europe by sparking a trade war.
The Eurozone is already contending with wage growth of 5 per cent, as workers demand to be compensated for the worst bout of inflation for a generation, keeping inflation above 4 per cent in the labour-intensive services sector.
Additional reporting by Mary McDougall in London
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