ECB cuts rates to 3.75%, future moves unclear

The European Central Bank (ECB) has cut its key deposit rate to 3.75%, a quarter-point decrease, while stopping short of providing guidance on future rate changes. This adjustment aligns with market predictions and comes amid an improved inflation outlook.

The ECB's statement highlighted a flexible approach, noting, “The Governing Council will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction. The Governing Council is not pre-committing to a particular rate path.”

Market reactions included a slight increase in the euro to $1.0880 and a rise in the yield on 10-year German bonds to 2.55%.

Revised forecasts now predict an average inflation rate of 2.2% in 2025, up from a previous estimate of 2%, with economic growth for this year adjusted to 0.9% from 0.6%. ECB President Christine Lagarde indicated that inflation will likely remain around current levels for the remainder of the year before declining towards the 2% target in the second half of next year.

Recent data showed a higher-than-expected rise in inflation and persistent wage growth, suggesting ongoing pressure on service prices. Upcoming wage data is expected to confirm this trend.

Lagarde expressed a balanced view on economic risks in the near term, citing stronger exports and services, alongside looser monetary policy, as supportive factors for continued recovery.