Introduction to the European Central Bank’s Interest Rates
The European Central Bank (ECB) is expected to hold interest rates steady at its upcoming meeting on July 24, marking a pause in the rate-cutting cycle that began in June 2024. This decision comes as inflation hovers around the 2% target, and new ECB projections are not due until September. Policymakers appear to be in a wait-and-see mode, given the fresh risks – including trade tensions with the United States – that cloud the outlook.
Current Interest Rates
As of June 11, the three ECB key interest rates are:
- Deposit facility rate: 2.00%
- Main refinancing rate: 2.15%
- Marginal lending facility: 2.40%
Is the ECB Rate-Cutting Cycle Coming to an End?
ECB officials have been dampening down expectations of an imminent interest rate cut. With disinflation broadly proceeding as expected and inflation expectations well anchored, the bar for another rate cut is very high. However, the trade conflict with the United States poses the greatest downside risk to the eurozone economy, and the stronger euro is a concern. This cautious tone has been echoed by Bundesbank president Joachim Nagel, who emphasizes the need for a "steady-hand approach."
Inflation Expectation
The ECB is closely watching wage growth as a key driver of underlying inflation, particularly in services. Overall inflation is now around the ECB’s 2% target, with June’s headline inflation coming in at 2.0%, and core inflation at 2.3%. ECB economists have revised their inflation forecasts, seeing headline inflation averaging 2.0% in 2025, 1.6% in 2026, and 2.0% in 2027.
Effect of a Strong Euro
The euro’s appreciation against the US dollar has raised concerns about disinflationary effects. However, the ECB seems broadly comfortable with the currency’s strength, viewing it as manageable and reflective of the new growth narrative in Europe.
Impact on Investors
Interest rate cuts typically lead to a rise in equity markets. In bond markets, falling interest rates result in lower yields, pushing bond prices higher. Lower rates make existing bonds more attractive on yields, impacting cash savers as savings account rates fall, while borrowers benefit as consumer debt and mortgages become cheaper.
Conclusion
The European Central Bank’s decision to hold interest rates steady in July is a strategic pause, awaiting the September projections before considering further rate cuts. The ongoing convergence of labor markets in the eurozone is a positive factor, potentially smoothing the challenges of one-size-fits-all policy mistakes. As the ECB navigates through trade tensions and the impact of a stronger euro, investors should remain vigilant, understanding how interest rate changes can affect their investments and savings. Upcoming ECB meetings in September, October, and December will be crucial in shaping the future of interest rates in the eurozone.
