As expected, the European Central Bank kept interest rates unchanged. Thus the interest rate on the main refinancing operations and the interest rates on the marginal financing facility and the deposit acceptance facility remain unchanged at 4.25%, 4.50% and 3.75% respectively.

It is recalled that the ECB last month cut interest rates from record highsa move some monetary policymakers called “rushed” that may make Christine Lagarde wary of the next step in the wake of persistently high inflation and wage increases.

What does the ECB say?

As the ECB states in its announcement: “The Governing Council decided today to keep the ECB’s three main interest rates unchanged. Incoming information broadly supports the Governing Council’s previous assessment on the medium-term outlook for inflation. While some measures of core inflation rose slightly in May due to one-time factors, most measures were either flat or fell in June. In line with expectations, the inflationary impact of the high rate of wage growth was offset by earnings. Monetary policy keeps financing conditions tight. At the same time, domestic price pressures remain high, service price inflation is elevated and headline inflation is likely to remain above target for much of next year as well.

The Board of Directors is determined to ensure that inflation will return to the medium-term target of 2% in time. It will keep policy rates sufficiently restrictive for as long as necessary to achieve this goal. The Governing Council will continue to take an evidence-based approach and make decisions on a meeting-by-meeting basis to determine the appropriate extent and duration of the contractionary change in monetary policy. In particular, its interest rate decisions will be based on its assessment of the outlook for inflation in light of incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission. The Board of Directors does not commit in advance to a specific course of interest rates.”

What do the markets expect?

Markets are pricing in two rate cuts in the rest of the year and just over five moves by the end of next year, a scenario that no monetary policy maker has so far questioned.

“According to our baseline scenario, we expect the ECB’s next move in September, which we estimate will be followed by a prolonged rate cut of 25 basis points per quarter, in December, March, June, etc. and new macroeconomic forecasts, said UBS economist Reinhard Cluse.