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The European Central Bank cut interest rates for the first time in nearly five years, at a faster pace than its U.S. and British counterparts, but warned that price pressures remain high.
The ECB cut its benchmark deposit rate by 0.25 percentage point to 3.75 percent after meeting its governing council in Frankfurt on Thursday.
Swaps market traders slightly lowered their chances of a second rate cut by September to 65% from 70% before the announcement.
“It is now appropriate to ease the restrictive nature of monetary policy” after inflation fell by more than 2.5 percentage points since the last rate hike in September 2023, the central bank said.
But the Fed cautioned that it is “not committing in advance to a particular interest rate path” and that “domestic price pressures remain strong due to rising wage growth, and inflation is likely to exceed its target next year.”
European Central Bank President Christine Lagarde said at a press conference that inflation is expected to “hover around current levels” for the rest of this year before falling next year.
She predicted wage growth would moderate and worker productivity would improve throughout the year, easing labor cost pressures for businesses.
Data released last week showed euro zone inflation accelerated for the first time this year to 2.6% in May, slowing from a peak of more than 10% expected in 2022.
The ECB raised its forecasts for this year and next, saying inflation would average 2.5% in 2024, 2.2% in 2025 and 1.9% in 2026.
“The statement arguably gave less guidance than one might have expected about what was to come, so the immediate tone is one of 'hawkish rate cuts,'” said Mark Wall, chief European economist at Deutsche Bank. “This isn't a sign that central banks are in a rush to ease policy.”
The euro rose 0.2% to $1.0888 after the ECB's announcement.
The yield on the euro zone's benchmark interest-rate-sensitive two-year German Bund rose 0.05 percentage point from the previous day to 3.02 percent.
Thursday's rate cut came a day after a similar cut by the Bank of Canada and follows decisions this year by central banks in Brazil, Mexico, Chile, Switzerland and Sweden to ease monetary policy.
Meanwhile, the Federal Reserve is expected to keep interest rates unchanged at 5.25-5.5 percent next week, the highest level in 23 years, as inflationary pressures in the world's largest economy are stronger than expected.
The Bank of England is also seen as unlikely to cut interest rates from their 16-year high of 5.25% when it meets on June 20.
The ECB raised its growth forecast for this year to 0.9% from 0.6%, and sees growth of 1.4% next year and 1.6% in 2026.
