Bundesbank Wants ECB to Keep Rates on Hold

The European consumer has been feeling the weight of high ECB rates, which have been increasing borrowing costs, however, the Bundesbank is calling on the ECB to be careful with lowering interest rates. Perhaps that was keeping the Euro stable against the USD today, while most risk currencies were tumbling lower.

The Bundesbank emphasizes that potential interest rate cuts should be “carefully considered” due to ongoing inflation risks. Factors currently supporting the economy are also complicating efforts to reach the inflation target. The labour market remains robust with high capacity utilization. Wage growth is strong, and prices are particularly rising in the services sector. Therefore, any further interest rate cuts should be approached with caution based on the current data.

Bundesbank Monthly Report Highlights

Caution on Rate Cuts Amid Inflation Risks

• The Bundesbank emphasizes that potential interest rate cuts should be “carefully considered” due to ongoing inflation risks.
• Factors that are currently supporting the economy are also complicating efforts to reach the inflation target.

Labour Market and Wage Growth

• The labour market remains robust with high capacity utilization.
• Wage growth is strong, and prices are particularly rising in the services sector.
• Therefore, any further interest rate cuts should be approached with caution based on the current data.

Economic Growth and Industrial Sector

• The Bundesbank notes that the German economy likely grew slower than expected in Q2.
• This slower growth is not surprising given the recessionary state of the industrial sector.

Additionally, the Bundesbank notes that the German economy likely grew slower than expected in Q2. This slower growth is not surprising given the recessionary state of the industrial sector. However, the ECB is projecting two more rate cuts in 2024, as policy-member Kazimir said earlier.

According to ECB’s Kažimír, the market’s expectation of two rate cuts by year-end is not entirely incorrect. However, he cautions that such pricing isn’t guaranteed at this time. He emphasizes that there is no need to make snap decisions and that upcoming information will shape the September decision. The ECB remains open to further easing if conditions warrant it. Currently, the ECB’s stance is that while they would like to lower rates further, they will base that decision on data in the coming weeks. The situation has not changed significantly since last month.