European Central Bank Halts Rate Cuts amidst Slow Inflation Progress to Reach 2%

Home buyers and businesses in Europe awaiting lower interest rates from the European Central Bank may need to be patient, as the bank focuses on controlling persistent inflation before considering rate cuts. This approach is similar to the stance of the U.S. Federal Reserve, which is also expected to hold off on lowering rates at its upcoming meeting at the end of July, though the Fed appears more inclined towards rate cuts than the ECB.

Economists predict that the ECB will likely maintain its key rate at 3.75% during its meeting in Frankfurt this week. The decision on lowering rates may be postponed until the September meeting, following a slight decrease in June. Changes in loan costs for individuals with tracker mortgages or businesses like wind-park developers might not occur until after the October meeting.

ECB President Christine Lagarde is anticipated to emphasize the bank’s careful assessment of inflation trends based on the latest data before making any rate decisions. Central banks worldwide, including the ECB and the Fed, had raised rates sharply to combat inflation stemming from events like the Russia-Ukraine conflict and the pandemic.

Inflation in the eurozone has decreased from its peak in October 2022 but remains around 2.5% in June, still above the ECB’s target of 2%. Challenges persist as inflation figures have been stagnant between 2% and 3%. Workers have been seeking higher wages to cope with the impact of inflation, particularly in sectors like services where prices rose by 4.1% last month.

The eurozone economy has experienced slow growth, with GDP expanding modestly in the first quarter of this year after a period of stagnation. The anti-inflation measures have impacted housing markets in Eurozone countries and projects like renewable energy, as higher mortgage and financing costs deter home sales and investments.

Despite the economic slowdown, the strong job market and low unemployment rates indicate that the higher rates have not pushed the economy towards recession. In contrast, the U.S. Federal Reserve is considering rate cuts to combat inflation and boost economic growth. Fed Chair Jerome Powell recently expressed confidence in inflation moderating towards the 2% target, hinting at potential rate cuts in September. Many economists expect the first cut to happen then, with additional cuts predicted for later in the year.