By Balazs Koranyi and Francesco Canepa
FRANKFURT (Reuters) -The European Central Bank cut interest rates on Thursday and kept the door open to further policy easing as concerns over lacklustre economic growth supersede worries about persistent inflation.
It was the fifth ECB rate cut since June and markets expect two or three more this year, driven by arguments that the biggest inflation surge in generations is nearly defeated and the flagging economy needs relief.
The ECB reaffirmed disinflation was “well on track” and welcomed slower growth in wages, which should help bring down inflation in the domestically focussed part of the economy.
“Wage growth is moderating as expected, and profits are partially buffering the impact on inflation,” it said in a statement accompanying the decision.
With the euro zone economy stagnating in the last quarter due to an industrial recession and weak consumption, the ECB is seen sticking to its easing path even after the U.S. Federal Reserve kept rates unchanged and hinted at a lengthy pause.
ECB policymakers are likely to have breathed a sigh of relief at their meeting after U.S. President Donald Trump’s new administration did not impose blanket trade tariffs as feared, although the threats he made have cast a shadow on the outlook.
ECB President Christine Lagarde is unlikely to commit explicitly to more cuts at her 1345 GMT press conference.
But she is expected to repeat her long-time guidance that the direction of policy is clear and that the risk of a trade war with the United States could sap weak growth even more.
The economies of Germany and France both contracted in the final quarter of 2024 and Italy stagnated, leaving Spain as the only country among the euro zone’s big four with a positive growth rate.
“I think the ECB is quite comfortable with the market pricing and financial conditions as priced by markets, in the grand scheme,” Danske Bank economist Piet Haines Christiansen said before the decision.
“The doves may have a preference for slightly easier conditions though, but I don’t think it’s a battle that they want to pick now, or actually be able to win,” Christiansen added.
Inflation, which rose to 2.4% in December, could still take a few months to ease back to the ECB’s 2% goal but there is little to challenge the narrative that all is on track.
Wage growth is easing, the labour market is softening, oil prices have come off early-year highs and the dollar’s relentless firming seems to have stopped for now.
A few voices are still likely to argue that pressure on services costs remains too high for comfort but that is more an argument for gradualism than for a pause.
