The European Central Bank (ECB) yesterday made its first interest rate cut since 2019, reducing borrowing costs from record highs, but gave few clues about its next move while warning of continuing inflation pressures.
The key deposit rate was lowered a quarter point to 3.75 percent, after the central bank had kept borrowing costs on hold since October last year.
Yesterday’s cut, the first since September 2019, marks the ECB diverging from the US Federal Reserve, which has also hiked rates aggressively but is not expected to start cutting for months due to stronger-than-expected data.
Photo: Alex Kraus, Bloomberg
All eyes are now on what happens next, after recent inflation and growth data for the 20 countries that use the euro came in stronger than anticipated.
But with inflation in the eurozone expected to remain above the ECB’s 2 percent target into next year, ECB President Christine Lagarde declined to say how fast or how deep any future rate cuts might be.
"What is very uncertain is the speed at which we travel and the time that it will take," she said at a post-meeting press conference.
"Price pressures have weakened, and inflation expectations have declined at all horizons,” Lagarde said. “We will keep policy rates sufficiently restrictive for as long as necessary to achieve this aim... We are not committing to a particular rate path.”
In an updated forecast, the Frankfurt-based institution hiked its inflation forecasts for this year and next. It no longer expects inflation to hit its two-percent target next year, as previously expected, but rather to come in at 2.2 percent.
The ECB also raised its growth forecast for this year, although lowered it slightly for next year.
While noting that "the inflation outlook has improved markedly," the ECB said in a statement that "domestic price pressures remain strong as wage growth is elevated, and inflation is likely to stay above target well into next year."
It reiterated typical language that it would "keep policy rates sufficiently restrictive for as long as necessary" to hit its inflation target, and that it would take a "data-dependent" approach to is decisions.
Decisions would be based on the inflation outlook, it said, while adding that the rate-setting governing council "is not pre-committing to a particular rate path."
Yesterday’s cut is unlikely to herald the start of a rapid easing cycle.
ING economist Carsten Brzeski said "sticky inflation will limit the room for additional rate cuts and the ECB’s statement also doesn’t give away any hints at the future path of the ECB."
Despite consumer price rises having slowed from peaks of over 10 percent in late 2022, when Europe was rocked by an energy shock, bringing inflation down to the ECB’s target is proving difficult. Data last week showed that inflation in the 20 countries that use the euro rose last month, and faster than expected — 2.6 percent year-on-year, up from April’s 2.4-percent increase.
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