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The European Central Bank has cut interest rates for the first time in nearly five years, moving faster than its US and UK counterparts, but warning that price pressures remain high.

The ECB lowered its benchmark deposit rate by a quarter percentage point to 3.75 per cent after its governing council met in Frankfurt on Thursday.

Traders in swaps markets slightly lowered their bets on a second cut by September to 65 per cent, from 70 per cent ahead of the announcement.

The bank said it was “now appropriate to moderate the degree of monetary policy restriction” in response to a more than 2.5 percentage point fall in inflation since its last rate increase in September 2023.

But it cautioned that it was “not pre-committing to a particular rate path” and warned that “domestic price pressures remain strong as wage growth is elevated, and inflation is likely to stay above target well into next year”.

At a press conference, ECB president Christine Lagarde said that inflation was expected to “fluctuate around current levels” for the rest of this year before declining next year.

She said the ECB had decided to cut “because overall our confidence in the path ahead — because we have to be forward looking — has been increasing [in] the past few months”, adding that the “reliability of our forecasts” had risen markedly in recent quarters.

Lagarde forecast that wage growth would moderate and worker productivity would improve over the course of the year, helping to ease labour cost pressures for companies.

Data released last week showed Eurozone inflation accelerated for the first time this year to 2.6 per cent in May, having slowed from a peak above 10 per cent in 2022.

Raising its forecasts for this year and next, the ECB said inflation would average 2.5 per cent in 2024, 2.2 per cent in 2025 and 1.9 per cent in 2026.

“The statement arguably gave less guidance than might have been expected on what comes next. In that sense, the immediate tone is a ‘hawkish cut’,” said Mark Wall, chief European economist at Deutsche Bank. “This is not a central bank in a rush to ease policy.”

The euro nudged higher 0.2 per cent to $1.0888 after the ECB announcement.

Interest rate-sensitive two-year German Bund yields — a benchmark for the Eurozone — edged higher to 3.02 per cent, up 0.05 percentage points on the day.

Thursday’s move came a day after a similar rate cut by the Bank of Canada and follows earlier decisions to ease monetary policy by central banks in Brazil, Mexico, Chile, Switzerland and Sweden this year.

By contrast, the US Federal Reserve is expected to keep rates on hold next week at a 23-year high range of 5.25 to 5.5 per cent after price pressures in the world’s biggest economy proved more stubborn than expected.

The Bank of England is also considered unlikely to lower its bank rate from a 16-year high of 5.25 per cent when it meets on June 20.

The ECB lifted its growth forecast for this year from 0.6 per cent to 0.9 per cent. It expects 1.4 per cent growth next year and 1.6 per cent in 2026.