Case for interest rate cut builds as ECB sees inflation falling to 2pc sweet spot next year

European Central Bank President Christine Lagarde. Photo: Reuters/Kai Pfaffenbach

Donal O'Donovan

New European Central Bank (ECB) forecasts for weaker inflation and slower growth have hiked expectations of interest rate cuts in June.

The ECB kept interest rates at record highs on Thursday but President Christine Lagarde did open the door for cuts this year, saying good progress had been made to bringing down inflation.

After their regular March meeting, ECB policymakers indicated they were preparing for a first cut in interest rates, probably in June, provided incoming data, especially on wages, confirms the trend.

"We did not discuss cuts for this meeting, but we are just beginning to discuss the dialling back of our restrictive stance," Ms Christine Lagarde said at a press conference.

The ECB’s next policy meeting is on April 11 but Ms Lagarde hinted strongly that a cut is more likely at the June 6 meeting, after European wage data for the first quarter has been published.

"We will know a little more in April, but we will know a lot more in June," she said.

Surging inflation in 2022 triggered the ECB’s round of nine interest rate increases in 15 months, in a bid to tame price hikes by limiting the supply of money into the economy.

Inflation is now declining sharply, building the case to underpin long-term growth by relaxing the supply of credit via lower interest rates.

However, new quarterly economic projections released on Thursday saw the ECB cut its forecast for price growth this year from 2.7pc to 2.3pc and it now expects inflation to fall to 1.9pc in summer 2025 and stay there until the end of 2026.

That suggests there is little or no case to continue fighting inflation by restricting credit but the central bank has been slow to reverse tack.

"ECB President Christine Lagarde today took another cautious step towards a first rate cut," Jörg Krämer , chief economist at Germany's Commerzbank, said.

"Lagarde hinted for the first time that the ECB believes a first rate cut in June is possible."

Inflation has been declining for nearly 18 months, partly as a result of a steep fall in fuel costs, which were boosted by Russia's invasion of Ukraine, but also reflected the impact of the ECB's increase in borrowing costs.