Lagarde signals cautious wait‑and‑see approach as ECB holds rates

The ECB or the European Central Bank is the central bank specifically for the Eurozone. The bank consists out of 19 European Union countries that make use of the euro as their monetary currency. The main function behind the ECT is to maintain price stability. This is done by setting interest rates and controlling the money supply.

A cautious approach to matters

Monetary policy decisions are made every six weeks by the Governing Council. The most recent press conference following the last decision was held by President of the ECB, Christine Lagarde as well as the Vice President, Luis de Guindos. In the first quarter the economy grew more strongly than expected. This was partly because firms frontloaded exports ahead of expected tariff hikes. But growth was also bolstered by stronger private consumption and investment.

Recent surveys point to an overall modest expansion in both the manufacturing and services sectors. At the same time, higher actual and expected tariffs, the stronger euro and persistent geopolitical uncertainty are making firms more hesitant to invest. The robust labor market, rising real incomes and solid private sector balance sheets continue to support consumption. Unemployment stood at 6.3 per cent in May, close to its lowest level since the introduction of the euro.

Lagarde provides an interesting discussion

Easier financing conditions are underpinning domestic demand, including in the housing market. Over time, higher public investment in defense and infrastructure should also support growth. More than ever, the Governing Council considers it crucial to urgently strengthen the euro area and its economy in the present geopolitical environment. Fiscal and structural policies should make the economy more productive, competitive and resilient.

Governments should prioritize growth-enhancing structural reforms and strategic investment, while ensuring sustainable public finances. It is important to complete the savings and investments union and the banking union, following a clear and ambitious timetable, and to rapidly establish the legislative framework for the potential introduction of a digital euro.

The Governing Council welcomes the Eurogroup’s commitment to improve the effectiveness, quality and composition of public spending and supports the efforts by European authorities to preserve the mutual benefits of global trade. Global trade itself provides countries with the opportunity to expand their markets and allow them access to services and goods. These are usually not available on domestic ground. This provides a more competitive edge to the market.

Important decision making by the ECB

Annual inflation stood at 2.0 per cent in June, after 1.9 per cent in May. Energy prices went up in June but are still lower than a year ago. Food price inflation eased slightly to 3.1 per cent. Goods inflation edged down to 0.5 per cent in June, whereas services inflation ticked up to 3.3 per cent, from 3.2 per cent in May. Indicators of underlying inflation are overall consistent with the two per cent medium-term target. Labour costs have continued to moderate.

Year-on-year growth in compensation per employee slowed to 3.8 per cent in the first quarter, down from 4.1 per cent in the previous quarter. Combined with stronger productivity growth, this led to slower growth in unit labour costs. Forward-looking indicators, including the ECB’s wage tracker and surveys on wage expectations of firms, consumers and professional forecasters, point to a further decline in wage growth.