The European Central Bank (ECB) will lower interest rates further, with risks to the inflation outlook now “two-sided,” president Christine Lagarde said.

Speaking days after the ECB reduced borrowing costs to 3 per cent, Ms Lagarde told reporters in Vilnius that the direction of travel is clearly “downward” and that the most recent move “is not the last interest-rate cut that we’ll do.”

“What we see now is a change of risk position,” Ms Lagarde said Monday. “Whereas up until now, our inflation projection was associated with upside risk – so we feel that inflation could actually pan out to be higher than our projections – we believe now that the risks are two-sided, which is different from balanced.”

Even after four cuts, the ECB reckons rates are still constricting economic activity at their current level.

Most officials say policy can gradually move to a neutral setting that neither restricts nor stimulates growth.

That point could be reached as soon as mid-next year, according to bets in money markets.

The challenge is that this threshold is determined by various underlying forces and is hard to observe in real time.

Ms Lagarde previously mentioned a range between 1.75 per cent and 2.5 per cent, though ECB executive board member Isabel Schnabel has said it could be as high as 3 per cent.

The backdrop to the debate is that the euro-area economy is struggling to gather momentum, with households and companies hesitant to spend money amid elevated uncertainty.

The ECB’s latest forecasts see growth accelerating to 1.1 per cent next year, while conflicts around the world, Donald Trump’s re-election and political turmoil at home mean it could well turn out weaker.

Analysts predict consecutive cuts in borrowing costs until the deposit rate reaches 2 per cent. Investors are pricing the possibility of a bigger step along the way – something that officials also aren’t ruling out.

Ms Lagarde is due to give a speech in Vilnius at 9:15 Central European Time. – Bloomberg