European Central Bank (ECB) president Christine Lagarde signalled on Thursday that the organisation is coming to end of lowering borrowing costs, after cutting its key deposit rate by a quarter of a percentage point to 2 per cent.
The reduction leaves the deposit rate at half the level of a year ago when its governing council started to reduce borrowing cost, following a flurry of rate hikes over the previous two years to rein in inflation.
“Victory laps are always nice, but there is always another battle,” ECB president Christine Lagarde told reporters when asked of the bank was prepared to finally call victory in the war against inflation after its eight rate cut in 12 months.
“I think we are getting to the end of a monetary policy cycle that was responding to compounded shocks, including Covid, including the war in Ukraine, the illegitimate war in Ukraine, and the energy crisis.”
Economists widely expect the ECB to reduce its deposit rate again in September, to 1.75 per cent, at the lower end of what the bank sees as a neutral rate that neither stimulates or restricts the economy.
By that stage the outcome of trade negotiations between the EU and US should be known, allowing a team of central bank staff, led by chief economist Philip Lane, to assess the impact of any future tariffs on inflation.
[ Tariff uncertainty makes ECB decision on interest rates easyOpens in new window ]
ECB staff lowered their average euro-zone inflation forecasts for this year and next by 0.3 percentage points, to 2 per cent and 1.6 per cent, respectively, driven by lower energy prices and a stronger euro. They see economic growth, measured as real gross domestic product (GDP) expanding by 0.9 per cent in 2025 and 1.1 per cent in 2026. The 2026 forecast marked a 0.1 percentage point downgrade from the previous estimate.
Staff also said that in a scenario where trade tensions escalated in the coming months, it would result in inflation and economic growth would likely come in “below the baseline projections”.
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“By contrast, if trade tensions were resolved with a benign outcome, growth and, to a lesser extent, inflation would be higher than in the baseline projections,” the ECB said.
The bank also reduced its main lending rate, to which tracker mortgages are linked, by a quarter of a point to 2.15 per cent on Thursday.
“The immediate beneficiaries of an ECB cut are the over 120,000 mortgage holders with tracker rates,” said Martina Hennessy, managing director of mortgage brokers, Doddl.ie. “Taking into account all of the mortgage rate cuts this year, the average tracker mortgage holder – with a margin of 1.1pc to ECB – will see total savings of €52 per month for every €100,000 owed over a 20-year term.”
Consumer prices rose 1.9 per cent from a year ago in May, down from 2.2 per cent in April, data published on Tuesday showed. Financial markets had expected a figure of about 2 per cent, which is the ECB’s official inflation target.
The rate had peaked at 10.6 per cent in late 2022, as Russia’s invasion of Ukraine and the subsequent energy crisis compounded the inflationary effect of global supply chain bottlenecks stemming from the Covid-19 pandemic.
“Most measures of underlying inflation suggest that inflation will settle at around the governing council’s 2 per cent medium-term target on a sustained basis,” the ECB said.
The governing council “will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance”, it said, adding that it is not pre-committing to a particular rate path.
Ms Lagarde insisted that she is “determined” to see out her term, which comes to an end in October 2027, after recent speculation that she might leave early to lead the World Economic Forum, which runs the annual gathering of global business and political leaders in Davos.
“I regret to tell you that you are not about to see the back of me,” she said.
