ECB Delivers Its First Rate Cut Despite Persistent Inflation

The European Central Bank delivered its first interest rate cut since 2019 today, signaling progress in its ongoing effort to bring inflation down to its 2% target, while acknowledging that the battle is far from over.

The ECB cut its deposit rate to 3.75% from a record-high 4.0% but did not provide any indication as to whether further easing would follow in July.

With this decision, the ECB joins the central banks of Switzerland, Sweden, and Canada in easing monetary policy after some of the steepest interest rate hikes in recent history.

In new forecasts released with the widely expected rate cut, the ECB revised its inflation expectations, now predicting an average of 2.2% in 2025, up from an initial estimate of 2.0%. This suggests that inflation will remain above the central bank’s 2% target well into the next year.

Inflation in the eurozone has fallen to 2.6% from over 10% in late 2022, mainly due to lower fuel costs. However, this progress has recently stalled, making what appeared to be the start of a significant ECB easing cycle more uncertain due to persistent inflation, similar to the situation in the United States.

ECB President Christine Lagarde stated in the subsequent press conference that the central bank is not yet on a path of policy easing despite recent progress. She noted that domestic price pressures remain strong, wage growth is elevated, and inflation is likely to stay above target well into next year.

Many economists have questioned the ECB’s decision, especially as the US Federal Reserve has remained on hold in several recent policy meetings due to higher-than-expected inflation readings, with no signs of action until at least September. This uncertainty has led to revisions in expectations for further rate cuts, with many anticipating one more cut this year.

President Lagarde neither confirmed nor denied that the central bank had entered a phase of easing monetary policy. Instead, she emphasized the strong likelihood of such a scenario, indicating that the pace and timing of future actions will depend heavily on incoming economic data.