The European Central Bank (ECB) kept interest rates unchanged as expected on Thursday and gave no indication of next steps, arguing that domestic price pressures remain high and inflation will be above target for a while until next year.
The ECB cut rates from last month's peak in a move seen as hasty by some policymakers after progress on bringing inflation down to its 2% target stalled. With domestic inflation still high and wage growth continuing, banks may be more cautious about follow-up.
The ECB issued a balanced message after Thursday's meeting, noting that corporate profits were absorbing some price pressure but risks remained and further evidence was needed before policymakers could take further action.
"The information received generally supports the Governing Council's previous assessment of the medium-term inflation outlook," the ECB said.
"Domestic price pressures remain high, services inflation is high and core inflation is likely to remain above target for some time into next year," the ECB said in a statement.
ECB President Christine Lagarde has signaled this outcome in recent weeks, so the focus has shifted to the September meeting, and investors will be checking her comments at the press conference for clues.
For now, the ECB has only reiterated that it will not make an initial commitment to any particular rate path and that the data it receives will guide its decision.
"The Governing Council will continue to follow a data-driven and meeting-by-meeting approach to determine the appropriate level and duration of sanctions," the ECB added.
Markets are counting on almost two rate cuts this year and a little more than five by the end of next year, a view that has not been challenged by any policymaker in recent weeks.
Another issue is that the September 12 policy meeting is far away and key economic data will be presented before policymakers meet again. Quarterly figures on growth, wages and productivity will all be released by September, plus two more monthly inflation readings, while the ECB will give its new inflation and growth forecasts at the meeting.
The ECB's main concern is that domestic prices, especially for services, are moving flat, while relatively fast wage growth limits keeping inflation above the ECB's target.
Some also argue that the ECB underestimates the risks to its central scenario, which puts inflation back on target at 2% by the end of 2025 even as rates continue to ease.
Another uncertainty is how quickly the US Federal Reserve will cut interest rates. While the ECB's policy is technically independent, it's hard to diverge too much from the world's largest central bank. Higher rates in the US will encourage investors to move their money there, weakening the euro and increasing import inflation.
Markets now see the Fed cutting rates in September, with another move coming before the end of the year, a timeline that would also support two more cuts by the ECB.
