ECB delivers its first rate cut despite sticky inflation
The European Central Bank delivered today its first interest rate cut since 2019, pointing to progress in tits ongoing task to bring inflation to 2% target, although admitting that the fight was far from over.
The ECB cut its deposit rate to 3.75% from a record-high 4.0% but did not provide any indication as to whether today’s action would be followed by a further easing in July.
With today’s decision, the ECB joins the central banks of Switzerland, Sweden and Canada in easing the monetary policy after some of the steepest streaks of interest rate hikes in recent history.
In new forecasts released with the widely expected rate cut, the ECB revised its previous estimate, expecting inflation to average 2.2% in 2025, compared to initial of 2.0% estimation, which implies that inflation would hold above the central bank’s 2% target well into the next year.
Inflation in the euro bloc has fallen to 2.6% from more than 10% in late 2022, mainly due to lower fuel costs, but that progress has stalled recently and what had looked like the start of a major ECB easing cycle only a few weeks ago now appears more uncertain due to signs that inflation may prove sticky, as has been the case in the United States.
ECB President Christine Lagarde said in the following press conference that the central bank is not in any policy easing path, despite the progress over recent quarters, as domestic price pressures remain strong as wage growth is elevated, and inflation is likely to stay above target well into next year.
Many economists have questioned ECB’s today’s action, especially as the US Federal Reserve has stayed on hold in a several of past policy meetings, due to higher-than-expected recent inflation readings, with no signs of any action until the earliest in September, that adds to revisions in bets on rate cuts soon and points to wide expectations for one more cut this year.
President Lagarde neither confirmed nor denied that the central bank entered a phase of easing its monetary policy, but instead pointed to a strong likelihood of such scenario and signaled that the pace and time required will continue to strongly depend on the economic data.