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The European Central Bank has cut interest rates for the first time in almost five years, moving faster than its counterparts in the US and UK, but warning that price pressures remain high.
The ECB cut its key deposit rate by a quarter of a percentage point to 3.75 percent after its governing council met in Frankfurt on Thursday.
Traders in the swaps cut their bets on a second cut by September to close to 60 percent, down from 70 percent before the announcement.
The bank said it was “now appropriate to moderate the degree of monetary policy tightening” in response to a fall of more than 2.5 percentage points in inflation since its last rate hike in September 2023.
But he cautioned that he was “not pre-committing to a particular rate path” and warned that “domestic price pressures remain strong as wage growth has picked up and inflation is likely to remain above target next year.”
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At a news conference, ECB President Christine Lagarde said inflation was expected to “fluctuate around current levels” for the rest of this year before falling next year.
She said the ECB had decided to cut “because overall our confidence in the way forward – because we have to look ahead – has increased [in] the last few months”, adding that the “reliability of our forecasts” had increased significantly in the last quarters.
The decision to cut rates was unanimous with the exception of one governor, Robert Holzmann, head of the Austrian central bank and one of the toughest members of the governing council.
“Data-based decisions should be data-based decisions,” Holzmann said in a statement to the Financial Times after Thursday’s meeting. Another ECB rate-setter said Holzmann had argued that a cut was inconsistent with the recent acceleration in inflation and wage growth in the eurozone, despite Lagarde’s efforts to achieve unity.
She said that while there was a “high probability” that the ECB was moving into a dial-back phase, this would “depend on the data we get”. “We will need more data to confirm consistently that we are on this disinflationary path,” she added.
Lagarde predicted wage growth would moderate and worker productivity would improve over the year, helping ease labor cost pressures for companies.
Data released last week showed that eurozone inflation accelerated for the first time this year to 2.6 percent in May, driven by growth in the labor-intensive services sector, slowing from a peak above 10 percent. in 2022.
Raising its forecasts for this year and next, the ECB said inflation will average 2.5 percent in 2024, 2.2 percent in 2025 and 1.9 percent in 2026.
The euro was 0.1 percent higher at $1.0874 as Lagarde spoke.
Yields on interest-sensitive two-year German bunds – a benchmark for the Eurozone – rose to 3.03 percent, up 0.06 percentage points on the day.
Dirk Schumacher, a former ECB economist now at the French bank Natixis, said: “I think the basis for them is still further cuts. But for that we need moderation in wage growth.”
Thursday’s move came a day after a similar rate cut by the Bank of Canada and after earlier decisions to ease monetary policy by central banks in Brazil, Mexico, Chile, Switzerland and Sweden this year.
In contrast, the US Federal Reserve is expected to keep rates on hold next week at a 23-year high range of 5.25 to 5.5 percent as price pressures in the world’s largest economy proved more stubborn than expected. .
The Bank of England is also seen as unlikely to cut its bank rate from a 16-year high of 5.25 percent when it meets on June 20.
The ECB raised its growth forecast for this year from 0.6 percent to 0.9 percent. It expects growth of 1.4 percent next year and 1.6 percent in 2026.
Additional reporting by Mary McDougall in London
