ECB to opt for summer pause after initial rate cut

FRANKFURT

The European Central Bank is expected to leave interest rates unchanged on July 18, giving the eurozone time to digest last month's first cut since 2019 as the inflation path remains unpredictable.

ECB governors lowered the closely-watched deposit rate from a record four percent to 3.75 percent at their June meeting, following an unprecedented campaign of monetary tightening to tame red-hot inflation.

ECB president Christine Lagarde said the cut was made possible thanks to steadily falling consumer prices. But she stressed it would not automatically kick off a rapid rate-cutting cycle.

Speaking in Portugal's Sintra earlier this month, Lagarde said "it will take time" for the bank to "gather sufficient data" before deciding the next move.

"The ECB will probably go into the summer break without lowering interest rates again," said Fritzi Koehler-Geib, chief economist at German public lender KfW.

After a surprise uptick in May, eurozone inflation slowed again in June to reach 2.5 percent.

While still above the ECB's two-percent target, it's a far cry from a 10.6-percent peak in 2022 after Russia's war in Ukraine sent energy and food prices surging.

Inflation is "heading in the right direction", Lagarde said in Sintra.

But it is still "likely to be a bumpy road until the end of 2024", she warned.

In June's updated forecasts, the ECB said it now expects inflation to return to target in late 2025.

Most observers believe the ECB will lower borrowing costs again at the September meeting, and then once more before the end of the year.