FRANKFURT (Reuters) – The European Central Bank cut interest rates for the first time in five years on Thursday but kept investors in the dark about its next move given increasing uncertainty over inflation after a sharp slowdown in the past year.
The ECB lowered its record-high deposit rate by 25 basis points to 3.75%, joining the central banks of Canada, Sweden and Switzerland in starting to unwind some of the steepest rate hikes used to tame a post-pandemic inflation surge.
Thursday’s well-flagged move is seen as the start of an easing cycle, but lingering price and wage pressures are clouding the outlook and may force the euro zone’s central bank to wait months before cutting again.
“The Governing Council will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction,” the ECB said in a statement.
While the ECB kept open its options for July, a string of influential policymakers, including board member Isabel Schnabel and Dutch central bank chief Klaas Knot have already made the case for a pause next month, suggesting the next window of opportunity for easing will be in September.
Economists see another two rate cuts from the ECB this year, most likely in September and December, while markets are pricing in between one and two more moves – a big change from the start of the year, when more than five cuts were anticipated.
“Interest rate decisions will be based on its 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,” the ECB added. “The Governing Council is not pre-committing to a particular rate path.”
Conservative policymakers, who still appear to command a majority on the rate-setting Governing Council, have argued that the ECB is not in any hurry to cut since a rebound in the economy proves high rates are not choking off growth.
Part of their caution may be due to unexpectedly stubborn inflation. Indeed, the ECB raised its 2025 inflation projection to 2.2% on Thursday from 2.0%.
“Despite the progress over recent quarters, domestic price pressures remain strong as wage growth is elevated, and inflation is likely to stay above target well into next year,” the ECB said.
Some economists say the biggest risk to the rate cut schedule is actually the U.S. Federal Reserve, not wages and inflation.
The Fed has clearly signalled a delay in policy easing and a further delay in U.S. rate cuts is likely to make the ECB more cautious too, as a widening interest rate differential would weaken the euro and raise imported inflation.
Attention now turns to ECB President Christine Lagarde’s press conference, where she is likely to be grilled about the ECB’s likely next moves.
(Reporting by Balazs Koranyi; Editing by Catherine Evans)
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