ECB set to start cutting interest rates at this week’s meeting

FRANKFURT

The European Central Bank is expected to begin cutting eurozone interest rates from historic highs this week, but sticky inflation means the move is unlikely to kickstart a rapid easing cycle.

Policymakers are poised to reduce eurozone borrowing costs by a quarter percentage point on June 6, taking the key deposit rate to 3.75 percent from its current record level.

"The ECB's own communication over the last two months has made it almost impossible not to cut" this week, said ING economist Carsten Brzeski.

ECB launched an unprecedented hiking cycle in mid-2022 as energy and food costs surged following Russia's invasion of Ukraine and amid pandemic-related supply chain woes.

After 10 consecutive increases, it has kept rates on hold since October, but steadily slowing inflation means a cut is now on the horizon.

But while it is a near certainty the 26 members of the ECB governing council will lower borrowing costs on June 6, recent stronger-than-expected data means it is unlikely to herald the start of a rapid rate-cutting cycle.

Despite consumer price rises having slowed from peaks of over 10 percent in late 2022, bringing inflation down to the ECB's 2 percent target is proving difficult.

Inflation in the 20 countries that use the euro rose faster than expected to 2.6 percent on year in May, up from April's 2.4 percent increase.

Officials are particularly concerned about strong price rises in the service sector as well as continued robust wage growth. 

After the inflation setback, Capital Economics' Jack Allen-Reynolds said another reduction at the ECB's meeting in July was now "unlikely."

"Several policymakers have been keen to stress that even if the bank cuts rates (this week)  it will be in no rush to cut again in July," its next meeting, he said.