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The European Central Bank has cut interest rates for the first time in almost five years, but warned that future reductions would depend on price pressures easing further.
Thursday’s quarter-point cut to 3.75 per cent, which has not yet been replicated by central banks in the US and UK, represented a milestone in the fight against inflation after the biggest surge in prices for a generation.
ECB president Christine Lagarde said there was a “strong likelihood” the decision marked the beginning of “dialling back” rates from their all-time high. But she added that further moves would “depend on the data that we receive”.
Several members of the ECB’s governing council told the Financial Times after Thursday’s decision that another rate cut at its next meeting in July seemed unlikely due to recent rises in inflation and wage growth.
After the announcement, traders in swaps markets lowered their bets on a second cut by September to close to 60 per cent, down from 70 per cent.
The ECB cautioned that it was “not pre-committing to a particular rate path” and warned it expected inflation to stay above its 2 per cent target until the final quarter of 2025.
“It looks like they’ve given themselves a bit more wiggle room for further caution, in case the data do not continue to come in as benign as they anticipate,” said Katharine Neiss, a former Bank of England economist now at investor PGIM Fixed Income.
The bank said it was cutting rates in response to a more than 2.5 percentage point fall in Eurozone inflation since its last rate increase in September 2023.
“There was widespread agreement that we are on track to bring inflation down to our target, and confidence is growing in our forecasts that should allow us to keep bringing rates down,” said one council member.
Lagarde said the ECB had decided to cut “because overall our confidence in the path ahead . . . has been increasing [in] the past few months”, adding that the “reliability of our forecasts” had risen markedly in recent quarters.
Raising its predictions for this year and next, the ECB said inflation would average 2.5 per cent in 2024, 2.2 per cent in 2025 and 1.9 per cent in 2026.
One governor, Robert Holzmann, the hawkish head of the Austrian central bank, dissented from the decision to cut rates.
“Data-based decisions should be data-based decisions,” Holzmann told the FT after Thursday’s meeting.
Another ECB rate-setter said Holzmann had argued that a cut was inconsistent with the recent rises in inflation and wage growth in the Eurozone.
Lagarde forecast that wage growth would slow and worker productivity would improve over the year, helping to ease labour cost pressures for companies.
Dirk Schumacher, a former ECB economist now at French bank Natixis, said: “I think the baseline for them is still further cuts. But wage growth moderating is needed for that.”
Data released last week showed Eurozone inflation accelerated for the first time this year to 2.6 per cent in May, driven by a surge in the labour-intensive services sector, having slowed from a peak above 10 per cent in 2022.
Negotiated wage growth in the bloc accelerated close to a record high of 4.7 per cent in the first quarter.
The euro was 0.1 per cent higher at $1.0874 after Lagarde spoke.
Interest rate-sensitive two-year German Bund yields — a benchmark for the Eurozone — edged higher to 3.02 per cent, up 0.05 percentage points on the day.
Thursday’s move came a day after a similar rate cut by the Bank of Canada and follows earlier decisions to ease monetary policy by central banks in Brazil, Mexico, Chile, Switzerland and Sweden this year.
By 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 per cent after price pressures in the world’s biggest economy proved more stubborn than expected.
The Bank of England is also considered unlikely to lower its bank rate from a 16-year high of 5.25 per cent when it meets on June 20.
The ECB lifted its growth forecast for this year from 0.6 per cent to 0.9 per cent. It expects 1.4 per cent growth next year and 1.6 per cent in 2026.
Additional reporting by Mary McDougall in London
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