European Central Bank policymakers warn against ‘autopilot’ approach to more rate cuts

A number of European Central Bank policymakers have called for a cautious approach to further interest rate cuts a day after it lowered borrowing costs for the first time in five years.

Joachim Nagel, the head of Germany’s central bank, said the ECB was “not driving on autopilot” when considering further rate cuts as the Bundesbank raised its forecast for inflation this year.

Other members of the ECB’s rate-setting governing council made similar comments on Friday. Estonia’s central bank chief Madis Müller said in a radio interview that the ECB “needs to make decisions rather cautiously and not rush too much in cutting interest rates”.

Latvia’s central bank chief Mārtiņš Kazāks said in a blog post that “victory is not yet in hand” over inflation and “further reductions in interest rates should be gradual”, while Gabriel Makhlouf, Ireland’s central bank boss, said it was unclear “how fast we’re going to carry on, or if at all”.

After the ECB cut its benchmark deposit rate by a quarter percentage point to 3.75 per cent on Thursday, several policymakers told the Financial Times that another cut at its next meeting in July seemed unlikely because of recent rises in inflation and wage growth.

The ECB released wage data on Friday that intensified concerns about sticky price pressures. The figures showed pay per Eurozone employee rose at an annual rate of 5.1 per cent in the first quarter, up from 4.9 per cent in the previous quarter.

Analysts saw Thursday’s decision as a “hawkish cut” after the ECB removed previous wording from its policy statement that signalled more rate reductions were coming and lifted its inflation forecast for this year and next. 

Swaps traders on Friday lowered their bets on the likelihood of a second cut by September to 56 per cent, down from 70 per cent before the meeting.

Eurozone inflation has fallen from 10.6 per cent at its 2022 peak to 2.6 per cent in May. But last month’s figure marked an acceleration from a low of 2.4 per cent in April, prompting concern about how long it will take for price growth to fall to the ECB’s 2 per cent target.

Finland’s central bank boss, Olli Rehn, said recent data “still point[s] to a slowdown in inflation in the medium term”. But he added that the Eurozone economy has recently been “stronger than expected”, which meant “concern that monetary policy would unreasonably slow down growth or put a brake on employment has decreased somewhat”.

On Thursday, ECB president Christine Lagarde said there was a “strong likelihood” its latest decision marked the beginning of a “dialling back” in rates from their all-time high. But she added further moves would “depend on the data that we receive” and warned inflation was likely to be “bumpy” for the rest of this year.

The one dissenter on the ECB’s governing council to Thursday’s decision was Robert Holzmann, Austria’s central bank chief, who said after the meeting that “data-based decisions should be data-based decisions”. On Friday, he said the ECB should be more cautious.

Nagel denied it had been “premature” to cut rates. But the German central bank on Friday warned inflation was proving “stubborn” as it raised its forecast for inflation in Europe’s largest economy this year from 2.7 per cent to 2.8 per cent.

Germany seems to have made a faltering start to the second quarter, after its economy rebounded with growth of 0.2 per cent in the first quarter following a contraction of 0.3 per cent in 2023.

Figures released on Friday showed German industrial production fell for the second consecutive month, dipping 0.1 per cent in April and confounding economists’ forecasts for a rise, while imports also increased more than exports.

The Bundesbank trimmed its growth forecast to 0.3 per cent for this year and 1.1 per cent next year, but slightly raised its 2026 forecast to 1.4 per cent.

“The German economy is emerging from economic weakness,” said Nagel. “Private households are benefiting from sharply rising wages, gradually falling inflation and the stable labour market.”