What Is Holding Back the European Central Bank From Further Rate Cuts

Inflation in the eurozone decreased to 2.5% in June from May's 2.6%, still above the European Central Bank's target. The ECB made a minor cut to its benchmark rate but remains cautious about further reductions. Service prices held steady at 4.1%, indicating persistent inflation. High rates aim to lower inflation by making borrowing more expensive but may slow growth. ECB President Christine Lagarde stated that more data is needed to confirm inflation risks have subsided before considering more cuts. Despite uncertainties, the job market stays strong, though higher rates have hit credit-sensitive sectors like real estate and construction, raising mortgage rates and ending a rally in house prices. Savers benefit from higher interest rates. Lagarde emphasized the June rate cut was moderate and not the start of ongoing reductions, with no additional cuts expected at the July 18 meeting. The European economy shows modest growth, but a slowdown in factory activity is evident. The inflation surge initially stemmed from higher energy prices after Russia cut natural gas supplies.

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