Upbeat ECB keeps rates steady, raising doubts about further easing
The ECB has cut its policy rate eight times since June 2024 after taming a surge in prices that followed the end of the COVID-19 pandemic and Russia's 2022 invasion of Ukraine.
But the economy was now in a "good place" and growth is in line with projections or a "little bit better", ECB President Christine Lagarde said, bolstering market bets that the ECB may be done with cutting rates altogether.
Financial markets which had fully priced in a rate cut this autumn just days ago now see only an 80% chance of a move, and even that may not come until the spring.
Confirming waning appetite for rate cuts, sources close to the discussion said the bar for a move in September was high and would require weaker growth and inflation, along with lower staff projections.
Lagarde herself took a more measured stance and would not be drawn into rate cut talk.
"We are in this wait-and-watch situation," Lagarde told a press conference. "We are in a good place because our projections point to inflation stabilising at target in the medium term."
She said the ECB's baseline projection for modest growth and inflation at its 2% target continued to hold, and that most data since the June data have confirmed that outlook.
Lagarde's optimistic tone even prompted some economists to look again at their own projections.
"We are revising our forecasts and no longer expect a final cut of the ECB deposit rate to 1.75% at the September meeting," Commerzbank economist Jörg Krämer said. "Now expect an unchanged deposit rate of 2.0% for the rest of this year and for 2026."
Recent data suggest the economy is holding up well and fresh PMI surveys out on Thursday indicated an acceleration in business activity, led by a solid improvement in the dominant services industry and with manufacturing recovering.
Euro zone banks have seen rising loan demand and policy uncertainty has not yet translated into an economic or market downturn even if some companies are starting to feel the pinch from tariffs in their profits.
Trade negotiations still pose a risk and a final deal is far from certain, even as reports suggest that the two sides are moving closer on a possible agreement based on a 15% tariff on U.S. imports of EU goods.
"We are attentive to where the negotiations are heading (but) we take the news one day at a time," Lagarde told a press conference.
"The sooner this trade uncertainty is resolved, the less uncertainty we will have to deal with and that will be welcomed by many economic actors including ourselves."
While the White House has dismissed the reports as speculation, 15% tariffs would be roughly halfway between the ECB's baseline and severe scenarios for the euro zone economy, presented last month, but milder than Trump's threatened 30%.
The ECB's June estimate showed that higher U.S. tariffs would result in lower growth and - depending on any EU retaliation - lower medium-term inflation in the euro zone.
Even the ECB's baseline projection from June, which incorporates 10% tariffs from the United States, saw price growth below 2% over the next 18 months.
Lagarde acknowledged that scenario included the possibility of a temporary undershooting of the inflation target but said it was not a cause for concern.
"With growth holding up and inflation at target, we believe the cutting cycle is drawing to a close," Konstantin Veit, a portfolio manager at PIMCO said. "The current 2% policy rate is likely a level considered the mid-point of a neutral euro area policy range by the majority of Governing Council members."
Lagarde's upbeat assessment also pushed short-dated German bond yields to their largest daily rise in two months, as traders took it as a signal that another series of rate cuts next year might be unlikely.
"Taking today's meeting at face value, the bar for yet another rate cut this year has clearly been raised," ING economist Carsten Brzeski said. "Still, we think that actual inflation could come in lower than the ECB expects and hard macro data could rather disappoint over the summer."
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Reuters
17 minutes ago
- Reuters
Heineken cheers EU-US trade deal as tariff problems hit shares
LONDON, July 28 (Reuters) - Dutch brewer Heineken ( opens new tab welcomed a trade deal between the European Union and the United States and said on Monday that it was weighing all options to deal with growing tariff challenges in the long term, including shifting manufacturing. The world's No.2 brewer exports beer, especially its namesake lager, to the U.S. from Europe and Mexico, and has also suffered from the indirect impact on consumer confidence in key markets like Brazil. Nevertheless, it reported a 7.4% increase in organic operating profit in the first half of the year, versus analyst expectations of 7%, crediting growth in once-difficult regions like Africa and Asia as well as cost savings. Heineken's shares fell 4.3% as the brewer cautioned on softer volumes for the remainder of the year as U.S. policies, especially on trade, disrupt markets in the Americas. CEO Dolf van den Brink welcomed the certainty brought by the trade deal clinched on Sunday, which reduced a threatened 30% U.S. tariff on EU goods to 15% - a rate that would still hit Heineken's U.S. profits. All options are being considered to mitigate tariffs long-term, including shifting manufacturing, he said, but added that such moves were capital intensive and would first need more consistency in policy. "We look at all options from ... continuing with our current setup, a more hybrid version, or otherwise," he told journalists on a call. "If and when we deem them financially to be more attractive in the mid- to long-term, we would for sure explore them." Heineken still faces U.S. tariffs of up to 30% on products it produces in Mexico unless the Mexican government can reach an agreement with Washington ahead of an August 1 deadline. Executives told journalists that since the first quarter, Heineken has also seen economic uncertainty hit spending and confidence in the U.S., Brazil and Mexico. In Mexico, remittances from the U.S. have fallen significantly, impacting beer industry sales. And U.S. Hispanic consumers were also spending less, van den Brink said. Heineken continues to expect annual profit growth of between 4% and 8%. The company also beat forecasts for second quarter revenue and volume, with growth in markets like Vietnam and India, and increased an annual cost-saving goal by a quarter to 500 million euros ($586 million). "They have slightly downgraded their volume everything going on in the to me doesn't feel like a terrible outcome," said Ryann Dean, global analyst at Heineken investor Aylett Fund Managers. Heineken's strong growth in markets like India and China, and consistent profitability, more than offset this, he continued, adding that emerging markets would drive Heineken's long-term volume growth. ($1 = 0.8535 euros)
Reuters
20 minutes ago
- Reuters
UK's STV warns of annual profit miss on subdued ads market, shares plunge
July 28 (Reuters) - British digital media firm STV Group (STVG.L), opens new tab warned on Monday that annual revenue and profit would fall short of market expectations due to a worsening advertising market, sending its shares to a more than 12-year low. Shares fell over 24% - biggest percentage drop since November 2007 - to 145.4 pence. STV has two divisions, Audience, which runs commercial public service broadcaster STV and streaming service STV Player and heavily relies on advertising, and Studios, Scotland's largest TV production company which gets commissions from the likes of Netflix and BBC to produce content. A worsening macroeconomic backdrop in the UK has led to fewer funding approvals for creative projects, which has impacted the group's unscripted content, such as talk shows or documentaries, with some projects in advanced development stages not being approved and some being delayed to 2026. STV Group said its scripted labels remained strong and it was still working on projects for Netflix, Apple, Sky and the BBC, with financial expectations remaining unchanged for that segment. The company expects total advertising revenue, which makes up the lion's share of group revenue, to be down about 8% in the third quarter due to a challenging advertising market. The group expects total revenue to range between 165 million pounds and 180 million pounds ($221.50 million and $241.63 million), and an adjusted operating margin of about 7% for the year ending December 31, 2025. ($1 = 0.7449 pounds)
Daily Mail
20 minutes ago
- Daily Mail
George Russell nears £30m-a-year Mercedes deal - with bosses accelerating talks amid Max Verstappen's Red Bull stance
George Russell is closing in on a £30million-a-year, multi-season deal to stay at Mercedes, Mail Sport can reveal. Negotiations have accelerated over the last few weeks and a source close to the talks confirmed: 'All the main points have been agreed.' Finer details, such as the number of sponsor appearances Russell will undertake, are still to be ironed out. Mercedes have pushed for a conclusion ahead of the summer break that follows this weekend's Hungarian Grand Prix. But there may be too many obstacles for that to be accomplished by then, with Russell's management, supported by legal advisers, poring over the new contract. Mercedes have accepted that defending world champion Max Verstappen is staying at Red Bull for 2026. He would have been mad to move before seeing how new regulations coming in next season play out. And now that the Dutchman is 28 points clear of Russell following Sunday's Belgian Grand Prix, it is impossible for him to activate a release clause that relied on him being outside the top three in the championship by the time of the summer break. Verstappen, third in the standings to Russell's fourth, could still buy himself out of his Red Bull deal, which runs until 2028, but he is not even considering that. Nor are Mercedes. So Mercedes will stick with Russell and Italian teenager Kimi Antonelli. Mercedes are belatedly content that Russell is a suitable No1, having produced his most consistently impressive form this year. He notched a win, in Canada, and has outscored Antonelli 157 points to 63. Russell may have hoped for a salary closer to those of Verstappen and Ferrari's Lewis Hamilton - each on about £60m a year. But their achievements, with 11 world championships between them, dwarf Russell's four race victories - for all his potential indicated by near-flawless displays in an often-tricky car. Nor does he have the mass global fan base of Hamilton, his predecessor as Mercedes' star driver (whom Russell beat in two of their three seasons together), and the relative limit of his commercial attractiveness to the brand and business is reflected in the terms he is being offered. Mercedes have told Russell, for example, that if he reduces his sponsor commitments it is fine but will be reflected in his pay. However, a salary of around £30m still puts him on a par with leading non-championship winning contemporaries such as Charles Leclerc at Ferrari and Lando Norris at McLaren. A multi-year deal is a vote of confidence in Russell from boss Toto Wolff, though it remains to be seen what freedom of he might have if he wanted to move from the Silver Arrow in the next couple of years.
