Lagarde says September interest rate decision is 'wide open'

European Central Bank president Christine Lagarde suggested the wars in Ukraine and Gaza could impact energy markets, which may impact inflation. Picture: AP/Michael Probst

European Central Bank (ECB) president Christine Lagarde closely guarded whether the regulator would cut interest rates further in September.

Speaking at a press conference in Frankfurt, Ms Lagarde said the Governing Council remained “wide open” to what it would do at its next monetary policy meeting in September, but experts have nonetheless predicted at least two more interest rate reductions by the end of the year.

Ms Lagarde said the ECB would keep monetary policy “sufficiently restrictive for as long as necessary”. 

“Domestic price pressures are still high, services inflation is elevated and headline inflation is likely to remain above our target well into next year," she said.

However, Davy Stockbrokers said markets had priced in a total 0.5% reduction in interest rates by the end of the year, while international wealth management firm Investec made similar predictions as wage growth is set to moderate and purchasing power is expected to improve amid cooling inflation.

Davy investment strategist Stephen Grissing said it was not “a major surprise” the ECB did not announce further rate reductions on Thursday due to persistent wage growth and stubborn inflation lingering above the regulator’s target of 2%.

Ms Lagarde made her comments after the ECB hit pause on interest rate cuts at its July meeting, after reducing rates last month. 

The regulator will break for the summer in August before reconvening in September. Ms Lagarde outlined a number of risks that could lead to interest rates staying higher for longer. Among these risks is the potential impact of EU tariffs on Chinese imports.

An escalation of trade tensions between major economies would weigh on eurozone growth.

Ms Lagarde also suggested the wars in Ukraine and Gaza could impact energy markets, which may impact inflation.

Since July 2022, the ECB implemented 10 interest rate hikes, the last one was announced in September 2023 and tracker mortgage customers have carried the full weight of these increases.

There are about 179,000 tracker mortgage customers in the Republic, all of whom are exposed to monetary policy changes, including reductions.

A tracker customer with a mortgage of €200,000 may see monthly repayments reduce by a further €26 if another 0.25% rate reduction is implemented in September, said broker and managing director of Dowling Financial Michael Dowling.

Mr Dowling added he did not expect Irish banks to pass on all future rate cuts to variable and fixed rate customers given the slow pace among lenders to implement interest rate increases.

MortgageLine broker and managing director Stephen Hamilton also said while there had been mortgage rate cuts by some lenders since the start they year “the reason for the cuts is probably more down to competition than any correlation with the ECB reductions”. 

The three main lenders in the retail banking market in the Republic recently posted bumper annual profits, fuelled by high interest rates.