ECB cuts interest rates, future moves remain uncertain

The ECB's rate cut to 4 percent signals a shift, but future adjustments depend on evolving inflation data

ECB cuts interest rates, future moves remain uncertain

The European Central Bank (ECB) cut interest rates as promised but left investors uncertain about future policy, stating that inflation will take longer to reach two percent, as reported by BNN Bloomberg.

The widely expected quarter-point reduction in the deposit rate lowered it from its nine-month peak of four percent. However, the upward revision of next year’s consumer-price growth forecast to 2.2 percent from two percent surprised many.

President Christine Lagarde acknowledged a marked improvement in the inflation outlook and mentioned a “strong likelihood” that the ECB is entering a “dialing-back phase.” However, she did not confirm that this change has taken place.

Despite expectations of another rate cut this year, investors are questioning the timing. Cutting rates while inflation remains high could harm the ECB’s credibility. Traders now predict just one more rate cut this year, with September being the most likely timing.

“Going forward, for the ECB’s credibility, they will need to hold a very, very neutral stance,” said Vasileios Gkionakis, senior economist, and strategist at Aviva Investors, on Bloomberg Television.

He suggested the ECB might have cut rates due to prior commitments rather than current conditions. He described the decision as “almost exclusively driven by it being far too embarrassing for the Governing Council to back-pedal” on their earlier promises.

This decision begins to reverse the series of unprecedented rate hikes used to combat the euro zone’s severe inflation spike. This move positions the ECB ahead of the US Federal Reserve and the Bank of England in loosening monetary policy.

The goal is to boost the 20-nation economy after two years of stagnation and mild recession. However, recent data, including May inflation, early-year wage increases, and private-sector business activity, have been higher than anticipated.

Lagarde indicated that labour costs would continue to fluctuate in the near term.

“Inflation in Europe hasn’t been on a neat downward trajectory, echoing the same awkward policy and credibility dilemma faced by the Federal Reserve,” said Julian Howard, lead investment director and head of multi-asset solutions at GAM Investments.

Bloomberg Economics commented, “The ECB tried to communicate its discomfort with elevated cost pressures, even though the Governing Council decided to reduce interest rates by 25 basis points today. President Lagarde hinted at a pause in July and the potential for more action in September, although she refrained from providing any clear indications on the timing for the cut.”

Insiders suggest a second cut in July is unlikely, and some doubt a September move. Lagarde did not clarify the timing of future rate adjustments. “Are we today moving into a dialing-back phase? I wouldn’t volunteer that,” she said.

“There’s a strong likelihood, but it will be data-dependent, and what is very uncertain is the speed at which we travel and the time that it will take.”

Lagarde advised against paying too much attention to predictions from her Governing Council colleagues. “We know the path we are on, but we also know there will be other bumps on the road,” she said.

The ECB’s latest quarterly outlook predicts inflation will moderate to two percent in the third quarter of 2025, rather than mid-2025 as previously forecast. Theophile Legrand, a rates strategist at Natixis SA, said this revision adds to the “sticky inflation story that may limit the room for additional rate cuts.”

Nicolas Forest, chief investment officer at Candriam, stated, “This initial cut may not signal the start of a sustained easing cycle. On the contrary, the new guidance remains cautious, avoiding any clear direction on future moves.”