ECB Cuts Rates but Worries About Too-Low Inflation

European Central Bank policymakers celebrate their supposed victory against rising inflation after performing their eighth interest rate reduction throughout this year. The bank faces growing worries that inflation may drop below target levels which mirrors the pre-pandemic period of stagnant prices across Europe.

The ECB announced its decision to halt interest rate reductions because consumer prices reached the 2% target after three years of exceeding it. The euro-area economy demonstrated unexpected growth during the first quarter according to Friday's data which showed a 0.6% expansion instead of the projected 0.3% while retail sales remained strong.

The growth surge shows signs of being abnormal because it stems from advanced exports to the U.S. before tariffs started and includes increased activity from Irish multinational corporations. Portugal's Mario Centeno expressed concern that early next year inflation might reach dangerous levels while Finland's Olli Rehn emphasized the multiple risks associated with rising trade tensions and potential supply chain disruptions.

The economic stagnation in Germany for its third consecutive year with zero or negative growth creates additional pressure on inflation despite Berlin's plans to increase public spending. The Bundesbank reduced its economic growth predictions because it expects minimal changes until 2027.

Other members of the ECB maintain a more positive outlook. According to Madis Müller from Estonia inflation has reached its target level but Martins Kazaks from Latvia believes rate cuts should stop to maintain policy flexibility until new data becomes available.

The ECB faces a challenging situation because its members disagree about how to handle the post-inflation period between the danger of low prices and ongoing economic difficulties.