The European Central Bank (ECB) reduced its key interest rate 25 basis points to 3.75 percent on Thursday (6 June). The sharp decline in inflation since last year allowed for a loosening of monetary policy. The big question now is how much more the bank will lower borrowing costs this year.
Italian central banker Piero Cippolone earlier this year called for rates to be “dialled back swiftly.” But wages have grown faster than expected on average. And most economists expect two more rate cuts at the September and December ECB governing council meetings.
The bank remained cautious on Thursday and said it would take a “data-dependent and meeting-by-meeting approach” to future easing and was not “pre-committing” to more rate cuts.
“Despite the progress over recent quarters, domestic price pressures remain strong as wage growth is elevated, and inflation is likely to stay above target well into next year,” the ECB said.
“Wages are not an easy matter” to predict,” ECB president Christine Lagarde told the press. Taking Germany, where wage growth has been strong, as an example, she said civil servants had been compensated for the first time since 2024, explaining why public wages had jumped 12 percent.
“This will not be the same in 2025,” she said, explaining why the ECB had decided to lower interest rates. “We are seeing those wage increases on a declining path.”
According to the latest forecast, eurozone inflation will level out at 2.5 percent this year, 2.2 percent in 2025, and 1.9 percent the year after. This means that in the medium term, average inflation will dip below target.
The EU’s statistics bureau Eurostat data for May show that inflation in some countries is already far below target, including in Italy (0.8 percent), Lithuania (0.8 percent), Finland (0.5 percent) and Latvia (0.2 percent).
Prolonged periods of low inflation or deflation in combination with low growth and high interest rates can be risky and can cause debt to GDP-ratio to increase.
It was “now appropriate to moderate the degree of monetary policy restriction” in response to inflation’s decline, the bank added. The ECB said high lending costs had “made a major contribution to bringing inflation back down” without offering more details of the effects that monetary policy has had on inflation.
The Bank of Canada reduced its benchmark rate on Wednesday and said more moves might come — becoming the first Group of Seven central bank to do so. In Europe, Sweden’s Riksbank and the Swiss National Bank had already lowered interest rates.
Japan conversely raised its interest rate for the first time in seventeen years in March to 0.1 percent, up from minus 0.1 percent.
Despite widely differing rate policies however, inflation trajectories have been “the same across the globe,” Gianluca Benigno, a macroeconomist and professor at the University of Lausanne, recently remarked on social media.
The United States Federal Reserve is increasingly expected to reduce interest rates for the first time in September.
Wester is a journalist from the Netherlands with a focus on the green economy. He joined EUobserver in September 2021. Previously he was editor-in-chief of Vice, Motherboard, a science-based website, and climate economy journalist for The Correspondent.
Wester is a journalist from the Netherlands with a focus on the green economy. He joined EUobserver in September 2021. Previously he was editor-in-chief of Vice, Motherboard, a science-based website, and climate economy journalist for The Correspondent.