The European Central Bank (ECB) has cut interest rates for the first time in nearly five years, acknowledging that the fight with inflation in the euro area is far from over.
The Thursday rate cut by a quarter percentage point takes the benchmark rate in the 20 countries that use the euro down to 3.75% from an all-time high of 4%, where it had stood since September. The regulator did not indicate whether a further easing would follow in July.
Eurozone inflation accelerated more than expected in May, to 2.6% from 2.4% the previous month, according to data released last week. Core inflation, which excludes volatile food and energy prices, also accelerated as wages grew rapidly.
The figures prompted the ECB to raise its inflation forecast for this year, to 2.5% from the 2.3% predicted in March. The regulator said on Thursday it would keep interest rates “sufficiently restrictive for as long as necessary” to return inflation to the 2% target.
“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 central bank said in a statement.
ECB President Christine Lagarde told reporters the regulator would continue to follow “a data-dependent and meeting-by-meeting approach.”
“We are not pre-committing to a particular rate path,” Lagarde announced.
The ECB’s decision follows a similar rate cut by the Bank of Canada this week. Regulators in Sweden and Switzerland have previously announced their own rate reductions this year.
By contrast, the US Federal Reserve is expected to keep rates on hold next week at a 23-year-high range of 5.25% to 5.5% amid inflation pressures.
The Bank of England is likewise not expected to lower its bank rate from a 16-year high of 5.25% at its meeting on June 20.