Lagarde’s nice inflation gamble: ECB cuts rates of interest

The European Central Bank (ECB) cut interest rates yesterday despite hiking inflation expectations for this year.

ECB policymakers are now expected to hit the pause button before slashing borrowing costs further amid fears that domestic prices could spiral again.

City analysts said there could be fewer rate cuts than previously expected this summer after the ECB hiked its inflation forecasts.

ECB President Christine Lagarde 

It comes ahead of a Bank of England meeting to be held later this month where policymakers will vote on whether to move rates or hold them at a 16-year high of 5.25pc.

At a meeting in Frankfurt, the European Central Bank’s economists decided to lower interest rates for the first time in five years in a boost for European households.

They voted to reduce borrowing costs by 25 basis points – from 4pc to 3.75pc – despite an increase in inflation last month.

But the central bank, led by president Christine Lagarde (pictured), warned price growth will stay above the 2pc target ‘well into next year’. In a move that has dampened hopes of a further cut next month, the ECB hiked expectations for inflation this year from 2.3pc to 2.5pc, and from 2pc to 2.2pc in 2025.

Susannah Streeter, analyst at financial services company Hargreaves Lansdown, said it looks ‘unlikely’ that economists will vote for another cut next month.

‘ECB policymakers are expected to hit the pause button now, as sticky inflation has returned as a worry,’ she said. ‘While rates went straight up like a rocket, they look likely to descend in bumpy fashion.’

She added: ‘Caution is set to stay the name of the game, as they await fresh indications about inflation’s path.’

Lagarde said that only one governing council member had opposed the bank’s decision to cut rates.

This is understood to be Austrian central bank chief Robert Holzmann, who had cited the rise in inflation projections as grounds to stay put.

Eurozone inflation has fallen to 2.6pc from a peak of 10.6pc in October 2022, although it has risen from 2.4pc in April. 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.

The raised inflation forecasts prompted traders to lower their bets on a second cut by September to close to 60pc, from 70pc before the announcement.

Lagarde said that the bank would keep interest rates ‘sufficiently restrictive for as long as necessary’ to bring price growth under control. She said the bank was ‘not pre-committing to a particular rate path’ and warned that ‘domestic price pressures remain strong as wage growth is elevated, and inflation is likely to stay above target well into next year’.

Mark Wall, the chief European economist at Deutsche Bank, said that the central bank had given ‘less guidance than might have been expected on what comes next’.

‘This is not a central bank in a rush to ease policy,’ he said.