ECB will have ‘open mind’ on whether to hike or pause rates in September

European Central Bank (ECB) president Christine Lagarde said the organisation will have an “open mind” in September on whether to increase future rates or press the pause button, after pushing through a ninth increase in a row to leave its main lending rate at 4.25 per cent.

While Ms Lagarde previously emphasised following recent rate announcements that the ECB had more ground to cover in raising borrowing costs to rein in inflation, she said on Thursday that “at this point in time, I wouldn’t say” that remains the case.

“We have an open mind as to what the decisions will be in September and in subsequent meetings, because this determination, based on data, might vary from one month to the other,” she said.

The ECB’s move to increase its key rates by 0.25 of a percentage point in the latest meeting of its governing council was widely expected.

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While headline euro zone inflation fell to 5.5 per cent in June from 6.1 per cent a month earlier and a peak of 10.6 per cent last October, core inflation – which excludes volatile items such as energy and food – actually rose slightly to 5.5 per cent, according to Eurostat, the EU statistics agency. The ECB inflation target is 2 per cent.

“We want to break the back of inflation. Two per cent is the goal – and we will get there, come what may,” said Ms Lagarde.

The ECB president warned governments that they should scale back supports extended to households and businesses as the energy crisis fades. “This is essential to avoid driving up medium-term inflationary pressures, which would otherwise call for a stronger monetary policy response,” she said.

The latest rates decision follows on from an ECB bank lending survey published this week which showed the sharpest decline in credit demand from European companies on record.

“The near-term economic outlook for the euro area has deteriorated, owing largely to weaker domestic demand. High inflation and tighter financing conditions are dampening spending,” said Ms Lagarde.

Euro zone gross domestic product (GDP) was flat in the first three months of this year, following 0.1 per cent quarter-on-quarter contraction of the economy in the final quarter of 2022, the EU’s statistics agency Eurostat said last week.

“Attention now shifts to the upcoming September meeting and whether that will mark the high point in the current rate cycle,” said Des Lawrence, senior investment strategist with State Street Global Advisors in Dublin.

“We would not regard a 25 basis-point rate (0.25 of a percentage point) hike at the September meeting as unreasonable given the still elevated inflation numbers and projections. Beyond that we think there is a good case in favour of holding policy rates steady at those levels for some time.”

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In the Republic, banks have been more active at passing on rising ECB rates to businesses than mortgage holders.

The average interest rate on new Irish business loans had almost doubled to 6.05 per cent in the year to May, resulting in borrowing costs that are about a third higher than those faced by companies across the wider euro zone, according to the Central Bank’s latest monthly interest rates report, published earlier this month.

By comparison, the average new Irish mortgage rate increased by 40 per cent over the same period, to 3.84 per cent, it said.

Irish banks are continuing to lag behind European peers in passing on official rate hikes to mortgage customers as they pay households little or nothing on most of their deposits.