The European Central Bank (ECB) will not be undertaking any cuts to interest rates in its final policy gathering before the summer holiday. This comes as no surprise, considering there was a decrease in May that brought borrowing costs down from an all-time peak. However, the key aspect to look out for will be any hints from the central bank regarding potential future cuts within the year. Nonetheless, there emerges a new wave of uncertainty.
Post the June quarter-point cut, a similar cut was anticipated for September. But this expectation is now clouded in doubt. Some ECB council members are still apprehensive about the risks of inflation, and the outcome of the French election has raised concerns. With the composition of the government currently unclear, it seems unlikely that France will take measures to reduce its budget deficit, which stood at 5.5% of its GDP last year. In fact, there could be potential adoption of crowd-pleasing moves that could worsen the situation by forming part of the conditions for a coalition, such as elevated expenditure or tax deductions, both of which may intensify inflation by increasing money flow into the economy.
France is amongst seven EU nations facing a European Commission procedure due to budget deviations. It is anticipated that countries breaching the euro zone’s monetary rules will receive warnings in the meeting happening on Thursday. The euro zone’s finance ministers, during their meeting in Brussels, highlighted the necessity for consistent and gradual fiscal consolidation in the euro area considering the need to curtail elevated deficit and debt levels.
Paschal Donohoe, the Minister of Public Expenditure and chair of the Eurogroup, mentioned that phasing out the temporary assistance and energy credits brought in to combat the cost of living crisis could go a long way in stabilising the national treasury. However, this might not be feasible.
The ECB isn’t under the pressure of time. Moreover, evidence from inflation suggests that price pressures continue to relax and the overall economic situation remains varied. The current high-interest rates open up opportunities for a gradual and careful continuation of interest rate cuts for the remainder of the year. Though this move may bear some risks, the implications of inaction could potentially be more damaging.