Thursday’s decision will mark the first time in over two decades that it will have lowered borrowing costs in response to a classical easing of inflation pressures, rather than a financial catastrophe hitting the currency union.
As such, Lagarde, who has often been criticized for lacking central banking expertise, has won a major battle. But she has not yet won the war against inflation.
Headline inflation accelerated in May for the first time this year to 2.6 percent, topping analysts’ expectations. Faster-than-expected wage growth and stronger-than-expected economic output have also kept alive the risk that it stays above target for longer than the ECB is wiling to accept.
While analysts generally expect ECB staff to raise their growth and inflation forecasts only marginally – and continue to point to the ECB meeting its 2 percent inflation target – they have warned that underlying pressures, notably in services prices, may cause a further upward revision to the inflation forecast in the September forecast round.
At the same time, stronger-than-expected price pressure in the United States, which is set to keep the Federal Reserve on hold for some time yet, risks constraining the ECB’s easing ambitions, as diverging significantly from the Fed could hurt the euro. Austrian National Bank chief Robert Holzmann is among those who stressed such challenges.
Other hawks, such as executive board member Isabel Schnabel, have warned against rushing into a series of cuts while doves, including the Bank of Italy’s Fabio Panetta, are more concerned about keeping policy unnecessarily tight at a time when Europe has only just escaped a recession. He and ECB chief economist Philip Lane have both stressed that tighter U.S. policy and financial conditions cut both ways.
