The European Central Bank (ECB) yesterday cut interest rates despite rising inflation expectations for this year.
ECB policymakers are now expected to hit the pause button before cutting borrowing costs further amid fears that domestic prices could soar again.
City analysts said there could be fewer rate cuts than previously expected this summer after the ECB raised its inflation forecasts.
ECB President Christine Lagarde
It comes ahead of a Bank of England meeting later this month, where policymakers will vote on whether to move rates or keep them at a 16-year high of 5.25 percent.
At a meeting in Frankfurt, European Central Bank economists decided to lower interest rates for the first time in five years to boost European households.
They voted to reduce borrowing costs by 25 basis points – from 4% to 3.75% – despite a rise in inflation last month.
But the central bank, led by President Christine Lagarde (pictured), warned that price growth will remain above the 2 percent target “well into next year.” In a move that has dashed hopes of a further cut next month, the ECB raised inflation expectations for this year from 2.3 percent to 2.5 percent, and from 2 percent to 2.2 percent. in 2025.
Susannah Streeter, an analyst at financial services firm Hargreaves Lansdown, said it appears “unlikely” economists will vote for another cut next month.
“ECB policymakers are expected to hit the pause button now as persistent inflation has once again become a concern,” he said. “While rates have skyrocketed, they look likely to fall unevenly.”
He added: “Caution will continue to be the name of the game, while awaiting new indications on the trajectory of inflation.”
Lagarde said only one member of the governing council had opposed the bank’s decision to cut rates.
This is understood to be Austrian central bank chief Robert Holzmann, who had cited rising inflation projections as a reason for staying put.
Eurozone inflation has fallen to 2.6 percent from a peak of 10.6 percent in October 2022, although it has risen from 2.4 percent in April. What only a few weeks ago looked like the start of a major ECB easing cycle now looks more uncertain given signs that inflation could become rigid.
Elevated inflation forecasts led traders to reduce their bets on a second cut by September to around 60 percent, from 70 percent before the announcement.
Lagarde said the bank would keep interest rates “sufficiently restrictive for as long as necessary” to control price growth. He said the bank was “not previously committing to a particular rate path” and warned that “domestic price pressures remain strong as wage growth is elevated, and inflation is likely to remain for above target well into next year.
Mark Wall, chief European economist at Deutsche Bank, said the central bank had given “less guidance than might have been expected on what comes next.”
“This is not a central bank in a rush to ease its policy,” he said.