FRANKFURT, July 25 (Reuters) – Recent economic indicators suggest the euro area has maintained strength despite global trade uncertainties, according to Friday’s reports, even as central bank officials attempt to moderate market expectations regarding interest rate adjustments.
The European Central Bank (ECB) maintained its current interest rates on Thursday, with its cautiously optimistic evaluation of the regional economy leading investors to reconsider the likelihood of additional rate reductions following a year-long easing period that reduced the benchmark rate from 4% to 2%.
Supporting this outlook, lending statistics revealed the fastest growth rate in two years, while an important ECB survey projected accelerated economic expansion alongside inflation meeting targets.
Additional findings from Germany’s Ifo Institute showed the seventh consecutive monthly improvement, suggesting the EU’s largest economy continues progressing despite trade disputes affecting exports and business investments.
These developments align with ECB President Christine Lagarde’s recent assessment that the region might have performed slightly better than anticipated during the previous quarter.
The combination of new economic data and Lagarde’s comments has led investors to reduce their expectations for further rate reductions. Current market projections indicate only a 50% probability of additional adjustments this year, a significant decrease from earlier predictions of certain rate cuts.
However, central bank officials appear to maintain a more cautious stance compared to financial market participants.
French central bank governor François Villeroy de Galhau emphasized ongoing growth risks tilted downward due to persistent uncertainty. He stressed the importance of flexible decision-making based on evolving data and forecasts.
A primary concern involves moderate growth, euro appreciation, and tariff impacts potentially reducing price increases, thereby increasing the likelihood that inflation, currently at the ECB’s 2% target, might fall below optimal levels requiring central bank intervention.
Villeroy noted that U.S. tariffs, whose extent remains unclear, are unlikely to increase inflation while the strengthening euro significantly reduces price pressures.
Finnish central bank president Olli Rehn also advised against excessive delay in decision-making.
In a blog post, Rehn stated that the value of waiting for additional information remains high, but cautioned against waiting indefinitely for reduced uncertainty, particularly under current U.S. leadership.
Several major financial institutions have revised their ECB forecasts accordingly.
Goldman Sachs, BNP Paribas, Nomura, and Commerzbank have all removed predictions for additional monetary easing, now expecting no further rate reductions this year, while JPMorgan postponed its expectation for a final rate cut from September to October.
However, Bank of America, Barclays, and UniCredit continue forecasting September adjustments, although some acknowledge reduced probability.
(This story has been corrected to clarify expectations regarding rate cuts rather than increases in paragraph 6)
Reporting by Balazs Koranyi; Editing by Emelia Sithole-Matarise and Hugh Lawson
— News Original —
Euro zone economy holds up even as ECB speakers look to temper market view of no more cuts
FRANKFURT, July 25 (Reuters) – The euro zone economy has remained resilient to the pervasive uncertainty caused by a global trade war, a slew of data showed on Friday, even as European Central Bank policymakers appeared to temper market bets on no more rate cuts.
The ECB kept interest rates unchanged on Thursday and its modestly upbeat assessment of the euro zone economy raised investors ‘ expectations that a year-long easing cycle, which halved the bank ‘s key rate to 2% from 4%, may be coming to a close.
Sign up here.
Supporting some of this optimism, lending data showed the fastest pace of expansion in two years, while a key ECB survey predicted quicker economic growth along with inflation right on target.
A separate Ifo survey on Germany meanwhile showed the seventh consecutive rise, indicating that the bloc ‘s biggest economy is still motoring along despite trade tensions holding back exports and corporate investment.
The figures also back comments from ECB President Christine Lagarde that the bloc may have performed a “little better” than expected last quarter.
The fresh data, combined with Lagarde ‘s comments, led investors to keep reducing their bets on further rate cuts. Markets now see just a 50% chance of another move this year, a major retreat from earlier this week when another cut was fully priced in.
Still, policymakers appeared to take a more cautious view than financial investors.
“Risks to growth were still tilted to the downside, with uncertainty remaining very high,” French central bank chief François Villeroy de Galhau said. “More than ever, in a volatile environment, agile pragmatism in light of data and forecasts is of the essence.”
One key worry is that tepid growth, a strong euro and the hit from tariffs will all curb price pressures, raising the risk that inflation, now at the ECB ‘s 2% target, will fall too low, requiring stimulus from the central bank.
“U.S. tariffs, the extent of which is still uncertain, are not expected to cause inflation to rise, while the appreciation of the euro is having a significant disinflationary effect,” Villeroy said.
Finnish central bank chief Olli Rehn also appeared to caution against staying on the sidelines for too long.
“Taking more time for decision-making is now particularly useful – the option value of waiting is exceptionally high,” Rehn said in a blog post. “However, we should not wait in vain for general uncertainty to diminish much, at least not under the current U.S. administration.”
Nevertheless, several major banks revised their ECB forecasts.
Goldman Sachs, BNP Paribas, Nomura and Commerzbank have all scrapped their predictions for more policy easing, expecting no more rate cuts this year, while JPMorgan pushed back its call for one final rate cut to October from September.
However, several others, including Bank of America, Barclays and UniCredit, continued to predict a move in September, even if some of them acknowledged that the chances of a move have diminished somewhat.
(This story has been corrected to say further rate cuts, not hikes, in paragraph 6)
Reporting by Balazs Koranyi; Editing by Emelia Sithole-Matarise and Hugh Lawson