FRANKFURT (Reuters) – The European Central Bank cut interest rates for the first time in five years on Thursday but left investors in the dark about its next move as uncertainty over inflation rises after a sharp slowdown over the past year.
The ECB cut its record high deposit rate by 25 basis points to 3.75%, joining the central banks of Canada, Sweden and Switzerland in beginning to phase out some of the strongest rate hikes used to fuel a post- tame pandemic inflation spike.
Thursday’s clearly announced move is seen as the start of an easing cycle, but persistent price and wage pressures cloud the outlook and could force the euro zone central bank to wait months before cutting again.
“The Governing Council will continue to take a data-dependent and meeting-by-meeting approach in determining the appropriate level and duration of restrictions,” the ECB said in a statement.
While the ECB has kept its options open for July, a range of influential policymakers, including board member Isabel Schnabel and Dutch central bank chief Klaas Knot, have already called for a pause next month, suggesting the next chance for easing could be in the will occur in the future. September.
Economists see two more ECB rate cuts this year, most likely in September and December, while markets are pricing in between one and two more rate cuts – a big change from the start of the year, when more than five cuts were expected.
“Interest rate decisions will be based on its assessment of the inflation outlook in light of incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission,” the ECB added. “The Board of Directors has not committed itself in advance to a specific interest rate path.”
Conservative policymakers, who still appear to have a majority on the rate-setting Governing Council, have argued that the ECB is in no hurry to cut spending as a recovery in the economy proves that high interest rates do not hinder growth.
Part of their caution may be due to the unexpected persistence of inflation. The ECB raised its inflation projection for 2025 from 2.0% to 2.2% on Thursday.
“Despite progress in recent quarters, domestic price pressures remain strong as wage growth is high and inflation is likely to remain above target well into the year,” the ECB said.
Some economists say the biggest risk to the rate-cutting schedule is actually the U.S. Federal Reserve, not wages and inflation.
The Fed has clearly signaled a slowdown in policy easing and a further slowdown in US interest rate cuts is also likely to make the ECB more cautious, as a wider interest rate differential would weaken the euro and increase imported inflation.
Attention now turns to ECB President Christine Lagarde’s press conference, where she will likely be questioned about the ECB’s likely next steps.
(Reporting by Balazs Koranyi; Editing by Catherine Evans)
