The European Central Bank delivered the interest-rate reduction it’s been flagging for months — moving away from a record high — but stopped short of indicating more may follow.
Officials led by President Christine Lagarde lowered the key deposit rate by a quarter-point to 3.75% on Thursday, as expected. Having held it at 4% for nine months, they said the inflation outlook has improved “markedly,” though they’ll “keep policy rates sufficiently restrictive for as long as necessary” after also raising projections for prices.
“Are we today moving into a dialing-back phase? I wouldn’t volunteer that,” Lagarde told reporters in Frankfurt. “There’s a strong likelihood but it will be data dependent, and what is very uncertain is the speed at which we travel and the time that it will take.”
The Governing Council pledged to continue adhering to a meeting-by-meeting approach, saying it isn’t “pre-committing to a particular rate path.” The rate cut was unanimous, except for one governor, according to Lagarde.
The decision begins to roll back the unprecedented barrage of hikes deployed to quell the euro zone’s worst-ever spike in prices. The step, which nudges the ECB ahead of the Federal Reserve and the Bank of England in loosening monetary policy, could also help to reinvigorate the 20-nation economy after two years of stagnation and a mild recession.
While Lagarde last month declared inflation “under control,” a string of recent data has pointed to enduring price pressures. That’s prompted investors and economists to dial back their expectations for rate cuts in 2024 to two or three in total.
Money markets held onto bets that the next cut will probably be in September. The euro rose 0.1% to $1.0880 and the yield on 10-year German bonds climbed four basis points to 2.55%.
An updated quarterly outlook published alongside the ECB’s policy statement forecasts inflation averaging 2.2% in 2025, up from 2% before, with this year’s projection for economic expansion lifted to 0.9% from 0.6%.
Lagarde said price growth will slow toward the 2% goal later than previously thought.
“Inflation is expected to fluctuate around current levels for the rest of the year,” she said. “It is then expected to decline towards our target over the second half of next year.”
While the higher inflation revisions aren’t a surprise, “they add to the sticky inflation story that may limit the room for additional rate cuts,” said Theophile Legrand, a rates strategist at Natixis SA.
The run-up to Thursday’s meeting saw policymakers leave little room for doubt in their intention to lower rates — even after some of the economic numbers they’d hoped would back their case moved in the wrong direction.
Inflation, for one, quickened more than anticipated in May, with a gauge of underlying trends also wrong-footing analysts by edging higher. Elsewhere, wage rises failed to moderate in the first quarter — suggesting elevated growth in services prices will persist. Another crucial measure of pay is due Friday and may paint a similar picture.
The economy, meanwhile, has bounced back more forcefully than expected from its malaise. Aside from the outperformance in growth, unemployment hit an all-time low in April and the troubled manufacturing sector is finally showing signs of life.
Lagarde said risks to the economy are balanced in the near term, with the recovery to continue thanks to stronger exports and services, alongside looser monetary policy.
ECB Chief Economist Philip Lane has said inflation and wage gains will “bounce around” this year, even as the general trend is for them to abate. Policy must continue to restrict activity throughout 2024, he says.
While the ECB has now cut before both the Fed and the BOE, which are grappling with more stubborn price pressures and are only expected to follow suit in the coming months, counterparts in other parts of the world have already started easing.
The Bank of Canada reduced its benchmark rate on Wednesday and said more moves may come — becoming the first Group of Seven central bank to do so since the biggest global inflation shock since the 1970s erupted. In Europe, Sweden’s Riksbank and the Swiss National Bank are among those to have already eased.
–With assistance from Greg Ritchie, William Horobin, Jasmina Kuzmanovic, Alessandra Migliaccio, Irina Anghel, Christoph Rauwald, Angela Cullen, Laura Malsch, Laura Alviž, Alexey Anishchuk, James Regan, Phil Serafino, Fergal O’Brien, Adam Blenford, Barbara Sladkowska, Harumi Ichikura, Joel Rinneby, Lizzy Burden, Max Ramsay and James Hirai.
