European Central Bank still has ‘long way to go’ to tame inflation: Lagarde

The European Central Bank (ECB) still has “a long way to go” to tame inflation, its president Christine Lagarde said on Friday, a day after the body announced its first interest rate cut since 2019.

In an op-ed published Friday evening in several European newspapers, Lagarde said that inflation had “slowed significantly” and was expected to fall to the target level of two per cent by next year.

“But there is still a long way to go until inflation is squeezed out of the economy. It will not be an entirely smooth ride,” she continued.

“Interest rates will therefore have to remain restrictive for as long as necessary to ensure price stability on a lasting basis. In other words, we still need to have our foot on the brake for a while, even if we are not pressing down as hard as before.”

The ECB on Thursday lowered the eurozone’s record high key deposit rate by a quarter of a point to 3.75 percent after having kept borrowing costs on hold since October.

The cut is expected to provide a much-needed boost for the beleaguered eurozone economy.

However, the bank reiterated that it would “keep policy rates sufficiently restrictive for as long as necessary” to hit its inflation target, adding the rate-setting governing council “is not pre-committing to a particular rate path”.

“We have made major progress, but our fight against inflation is not over,” Lagarde said in her op-ed.

“As the guardian of the euro, we are committed to ensuring low and stable inflation for the benefit of all Europeans.”

Meanwhile, ECB policymaker Robert Holzmann said on Saturday that it is too early to tell whether the European Central Bank has initiated a shift towards lower borrowing costs after it cut its benchmark interest rate this week,

The ECB cut the rate it pays on bank deposits to 3.75% from a record 4.0% on Thursday but held back from promising any more easing after a string of disappointing wage and inflation data in recent weeks.

Holzmann, the head of Austria’s central bank, was the only member of the ECB’s 26-member Governing Council to oppose the rate cut. The bank’s decision had been widely expected after the ECB had telegraphed its intentions ahead of time.

Going forward, the bank would be looking to avoid putting itself in any sort of bind, Holzmann told Austrian radio.

When asked whether the rate cut marked a shift towards lower borrowing costs, or was a step that did not commit the bank toward a particular direction, Holzmann was cautious.

“I think it’s a step in the right direction,” he said. “I hope - I don’t know - that there won’t be a need to raise rates again,” he added, saying future decisions would depend on data.

Among factors to consider would be the rate differential between the ECB and its U.S. counterpart, the Federal Reserve, Holzmann said in the interview.

If, as US policymakers have intimated they would this year, the Fed does not cut rates three times, that would affect exchange rates to the euro’s detriment against the dollar, which could fan inflation in the single currency area, he noted.

The ECB could only declare victory on inflation once it had eased to the bank’s target of 2%, he said.

“We hope we’ll be there in 2026,” Holzmann said. “That’s what the models predict. And that’s all based on the assumption that there are no further shocks.”

Euro zone annual inflation accelerated to 2.6% in May from 2.4% in April, according to a flash estimate.

Separately, the Fitch agency said on Saturday it has raised Cyprus’ credit rating by a notch to BBB+.

It cited the country’s heightened ability to withstand financial shocks, the government’s commitment to keeping its finances in order and a strengthened banking sector thanks in part to the lowest bad loan ratio since the global financial crisis.

Fitch said in a statement that it also lists the island nation’s outlook as positive.

The agency said household and corporate debt in Cyprus continued to fall last year, coming very close to the European Union average. It also pointed to the country’s “very strong fiscal performance” in the last two years, with a primary surplus to reach 4.5%, which it called “by far the highest” among countries that use the euro as their currency.

Public debt is expected to fall to 70.6% of gross domestic product this year and to 65.1% in 2025 thanks to high growth and large budget surpluses. Although the Cyprus’ debt level is still relatively high, the government has managed to reduce it “at one of the sharpest rates in the eurozone” and among other countries that the agency rates.

Other factors for the upgrade include relatively high income per capita and credible policies backed by the European Union and the eurozone.

Cyprus’ economic growth accelerated this year, and Fitch projects overall growth to reach 3% this year and 2025.

Fitch did note a large current account deficit due to low savings relative to investment and warned that ratings could change if there was a “structural fiscal loosening.”

A 2013 financial crisis forced Cyprus to seek a multibillion-euro bailout from its eurozone partners and the IMF that included a seizure of savings over 100,000 euros in the country’s largest bank and the shuttering of its second biggest bank. The seized deposits were used to prop up Cyprus’ ailing banking sector.

Agencies