UPDATE - ECB to follow data-dependent approach for monetary restriction, says chief

UPDATES WITH ADDITIONAL COMMENTS ON ECONOMIC ACTIVITY, INFLATION

By Ovunc Kutlu

ISTANBUL (AA) - European Central Bank (ECB) President Christine Lagarde said Thursday the institution will follow a macroeconomic data-dependent and meeting-by-meeting approach in determining the appropriate level and duration of monetary restriction.

"We are not pre-committing to a particular rate path," she told a press conference after the conclusion of the ECB's monetary policy meeting.

"In particular, our interest rate decisions will be based on our assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission," she added.

Earlier in the day, the ECB's Governing Council decided to keep the three key interest rates unchanged. The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 4.25%, 4.50% and 3.75%, respectively.

"While some measures of underlying inflation ticked up in May owing to one-off factors, most measures were either stable or edged down in June," said Lagarde. "At the same time, domestic price pressures are still high, services inflation is elevated and headline inflation is likely to remain above our target well into next year."

The ECB chief said the Governing Council is determined to ensure that inflation returns to the 2% medium-term target in a timely manner, and it will keep policy rates "sufficiently restrictive for as long as necessary" to achieve this goal.

- 'Muted growth' expected this year

Lagarde said the incoming information indicates that the euro area economy grew in the second quarter, but likely at a slower pace than in the first quarter, as the services sector continues to lead the economic recovery, but industrial production and goods exports have remained weak.

She noted that investment indicators point to "a muted growth" this year amid heightened uncertainty.

"Looking ahead, we expect the recovery to be supported by consumption, driven by the strengthening of real incomes resulting from lower inflation and higher nominal wages," she said.

"Moreover, exports should pick up alongside a rise in global demand. Finally, monetary policy should exert less of a drag on demand over time," she added.

Lagarde said the labor market remains resilient, and the unemployment rate remained unchanged at 6.4% in May to remain at its lowest level since the start of the euro.

"More jobs are likely to have been created in the second quarter, mainly in the services sector. Firms are gradually reducing their job postings, but from high levels," she added.

- Inflation expected falling to 2% target in 2Q25

Annual inflation in the euro area eased to 2.5% June, from 2.6% May, while annual food prices came in at 2.4% in June, 0.2 percentage points less than in May, while energy prices remained essentially flat last month, Lagarde noted.

Both goods price inflation and services price inflation were unchanged in June, at 0.7% and 4.1%, respectively, she added. "While some measures of underlying inflation ticked up in May owing to one-off factors, most measures were either stable or edged down in June."

Lagarde, however, said that domestic inflation remains high, while wages are still rising at an elevated rate, as higher nominal wages, alongside weak productivity, have added to unit labor cost growth.

"Owing to the staggered nature of wage adjustments and the large contribution of one-off payments, growth in labour costs will likely remain elevated over the near term," she said.

The ECB chief said inflation is expected to fluctuate around current levels for the rest of the year, partly owing to energy-related base effects.

Inflation is expected to decline later towards the ECB's target of 2% over the second half of next year, with weaker growth in labor costs, the effects of the central bank's restrictive monetary policy and the fading impact of the past inflation surge, she explained.