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A day after the European Central Bank cut borrowing costs for the first time in five years, several policymakers urged caution in cutting interest rates further.
Germany's central bank president, Joachim Nagel, said the ECB is “not operating on autopilot” when it comes to considering further rate cuts after the Bundesbank raised its inflation forecast for this year.
Other members of the ECB's interest-rate-setting governing council made similar comments on Friday. Estonian central bank governor Madis Muller said in a radio interview that the ECB “needs to take decisions quite carefully and not to cut interest rates too quickly.”
Latvian central bank governor Martins Kazaks said in a blog post that “victory is not yet in hand” over inflation and that “any further interest rate cuts should be gradual,” while central bank governor Gabriel Makhlouf said it was unclear “how quickly, or whether, interest rates will continue to be cut at all.”
After the European Central Bank (ECB) cut its benchmark interest rate by 0.25 percentage point to 3.75 percent on Thursday, several policymakers told the Financial Times that recent gains in inflation and wage growth make further rate cuts unlikely at its next meeting in July.
The ECB reinforced concerns about growing price pressures when it released wages data on Friday, showing that wages per employee in the euro zone rose 5.1% year-on-year in the first quarter, up from 4.9% in the previous quarter.
Analysts characterized Thursday's decision as a “hawkish rate cut” after the ECB removed previous language suggesting further rate cuts from its policy statement and raised its inflation forecasts for this year and next.
Swaps traders on Friday cut their expectations for the likelihood of a second rate cut before September to 56% from 70% before the meeting.
Eurozone inflation fell to 2.6% in May from a peak of 10.6% for 2022. But last month's figure accelerated from a low of 2.4% in April, raising concerns about how long it will take for price growth to fall to the ECB's 2% target.
Finland's central bank governor, Olli Rehn, said recent data “still points to a slowdown in inflation in the medium term,” but added that the euro zone economy has been “stronger than expected” recently and “concerns that monetary policy will unduly slow growth or put a brake on employment have somewhat diminished.”
ECB President Christine Lagarde said on Thursday that the decision was “likely” to be the start of “pulling back” interest rates from their record highs, but added that further moves would “depend on upcoming data” and warned that inflation was likely to remain “volatile” for the rest of the year.
The only dissenter on the ECB's governing council was Austrian central bank president Robert Holzmann, who said after the meeting that “data-driven decisions should be data-driven decisions.” He said on Friday that the ECB should be more cautious.
Nagel denied that the rate cut was “premature”, but the German central bank on Friday raised its inflation forecast for Germany, Europe's largest economy, to 2.8% this year from 2.7%, warning that inflation was proving “stubborn”.
Germany appears to have got off to a stumbling start in the second quarter after its economy bounced back with 0.2% growth in the first quarter, after posting a 0.3% contraction in 2023.
Figures released on Friday showed German industrial production fell for a second straight month, dropping 0.1 percent in April, belying economists' expectations of an increase, while imports rose faster than exports.
The Bundesbank lowered its growth forecast for this year to 0.3% and next year to 1.1%, but slightly raised its growth forecast for 2026 to 1.4%.
“The German economy is emerging from a period of economic weakness,” Nagel said, “with private households benefiting from faster wage growth, a gradually declining inflation and a stable labor market.”
