ECB cuts rates as expected, says well on track to tame inflation

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(Reuters) – The European Central Bank cut interest rates for the third time this year on Thursday in a nod to sluggish economic growth, some softening in an otherwise rock-solid labour market and easing consumer price pressures.

The ECB cut its deposit rate by 25 basis points to 3.25% as forecast in a Reuters poll of analysts, in a tacit acknowledgement that inflation, now below 2%, could settle around its 2% target quicker than previously thought.

But the bank gave no new clues about its next move, even if markets expect similar cuts at each of its next three meetings, taking the rate from a level where it restricts growth to at least a neutral setting by the end of next year.

“The incoming information on inflation shows that the disinflationary process is well on track,” the ECB said in a statement. “The inflation outlook is also affected by recent downside surprises in indicators of economic activity.”

A cut was widely expected after policymakers made the case for quicker policy easing in the run-up to the meeting on a series of weak growth readings and benign inflation data.

Poor sentiment indicators, weak consumer spending and a prolonged industrial recession suggest that the bloc is barely growing, which will put downward pressure on inflation, which slowed to 1.7% last month, its lowest level in three years.

“Domestic inflation remains high, as wages are still rising at an elevated pace. At the same time, labour cost pressures are set to continue easing gradually, with profits partially buffering their impact on inflation,” the ECB added.

But policy hawks are still likely to oppose quick rate cuts given that inflation could tick up in the coming months.

The labour market remains tight, unions continue to demand big wage increases, energy costs are volatile and services prices are still rising quickly, all of which suggests domestic inflation could remain relatively high for some time to come.

However, doves argue that growth is now so weak that unless the ECB acted quickly to shore up the bloc, inflation could actually fall below target and the ECB would have to go from fighting rapid price growth to excessively low inflation.

This debate is unlikely to have been settled on Thursday so ECB President Christine Lagarde may well offer no commitments and few clues about any future policy moves at her 1245 GMT news conference.