The President of the European Central Bank (ECB), Christine Lagarde, held a press conference after the Governing Council’s monetary policy meeting in Frankfurt, Germany on July 27, 2023. The ECB has raised interest rates for the ninth consecutive time, but there are hints of a possible pause in September due to easing inflation pressures and concerns about an impending recession.
To combat the significant increase in prices, the ECB has raised borrowing costs by a total of 425 basis points since last July. The central bank is worried that both rising costs and wages in a tight job market could perpetuate price growth. The ECB’s deposit rate now stands at 3.75 percent, its highest level since 2000, and the main refinancing rate is set at 4.25 percent.
During the press conference, Lagarde deviated from her usual practice of providing guidance for the next decision and stated that the future actions of the ECB were uncertain. While the central bank is determined to tackle inflation, Lagarde expressed that there may not be much more to do at this point and that the ECB’s decisions would depend on the data. She emphasized that there is a possibility of a rate hike or a pause in the future, highlighting the open-mindedness and unity of policymakers.
Analysts interpreted Lagarde’s tone as indicating a potential pause in September. Some policymakers favor a pause, anticipating a recession in the euro zone, while others prefer further rate hikes. The ECB’s policy statement stated that rates would be set at sufficiently restrictive levels for as long as necessary, but removed the reference to the rates needing to be brought to a level that would quickly cut inflation to the target of 2 percent.
The challenge lies in the slow decline of inflation, which may not reach 2 percent until 2025. Despite an initial surge driven by energy prices, inflation has spread to the broader economy through mark-ups and is increasing the cost of services. While overall inflation has decreased since October, underlying price growth remains high and may have even accelerated. The risk of second-round effects, where workers seek to recoup real incomes lost to inflation, has not worsened according to Lagarde.
The euro weakened as Lagarde delivered her remarks, reaching under $1.10. The markets had previously priced in another rate hike, but now there is doubt about a move in September. Tightening monetary policy further would align with comments from policymakers who believe that raising rates too far would be less costly than not raising them enough. The ECB is closely watching business indicators, investor and consumer sentiment, and bank lending surveys, which all indicate a deteriorating euro zone economy.
The uncertainties surrounding inflation and the economy make it difficult to predict future actions by the ECB. Lagarde acknowledged that the end of the ECB’s rate hike cycle is approaching, but there is still work to be done.
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Omprakash Tiwary is a business writer who delves into the intricacies of the corporate world. With a focus on finance and economic landscape. He offers readers valuable insights into market trends, entrepreneurship, and economic developments.
