ECB cuts rates for the first time in 5 years but raises inflation estimates: Lagarde predicts a bumpy ride
The ECB cuts rates but plans a slow and gradual reduction. Lagarde warns that the path will be uneven and gives no indication of next steps
2' min read
2' min read
The European Central Bank cuts rates for the first time since 2019. As expected. With a reduction of a quarter of a percentage point, it raised the deposit rate from 4 to 3.75 per cent, the benchmark rate from 4.50 to 4.25 per cent and the marginal lending rate from 4.75 to 4.50 per cent. The decision was taken with only one governor against. However, the inflation forecast was revised upwards.
The next decisions will be taken 'meeting after meeting' and the rate cut will follow 'a bumpy path', President Christine Lagarde told a press conference. The ECB therefore gives no indication of the pace of normalisation: rather, it emphasises in the statement that 'pressures remain strong, as wage growth remains high and inflation is likely to remain at higher-than-target levels for much of 2025'.
Forward-looking indicators on labour costs, Lagarde added, indicate that its growth will decline over the course of the year. Moreover, profits are absorbing some of the 'pronounced' growth in unit labour costs, 'which reduces its inflationary effects'.
The decline in rates is therefore likely to be relatively slow, not least because inflation forecasts have been revised upwards for 2024 and 2025. The June projections foresee an average inflation of 2.5% this year (2.3% in March), 2.2% next year (2%) and 1.9% in 2026 (unchanged). The core index (which excludes energy and food) is expected to be 2.8% (from 2.6% in March) in 2024, 2.2% in 2025 (2.1%) and 2% in 2026 (unchanged). Economic activity, meanwhile, is expected to rise from 0.9% in 2024 (0.6% in March), to 1.4% in 2025 (1.5% in March) and to 1.6% in 2026 (unchanged): the need for risk management interventions on growth thus remains limited after the June cut: risks remain balanced in the short term, Lagarde explained, even if they point downwards in the medium term.
As justification for the cut, the ECB recalled in the communiqué published after the meeting that inflation had fallen by 2.5 percentage points since September 2023, since rates had reached their 'terminal' level. Price pressures have weakened and expectations have calmed 'over all time horizons'.
