ECB cuts interest rates for the first time in 5 years

Unlock Editor’s Digest for free

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

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

Swaps market traders slightly reduced their bets on a second cut in September to 65%, from 70% before the announcement.

The bank said “now is the right time to adjust the level of restrictiveness of monetary policy” to cope with inflation falling more than 2.5 percentage points since the last interest rate increase in September 2023.

But they cautioned that they “do not commit in advance to a specific interest rate path” and warned that “domestic price pressures remain strong as wage growth picks up and inflation is likely to be above target in next year”.

At a news conference, ECB President Christine Lagarde said inflation is expected to “hover around current levels” for the rest of this year before falling next year.

She said the ECB decided to cut “because overall our confidence in the way forward – because we have to look to the future – has been increasing. [in] over the past few months,” adding that “the confidence in our forecasts” has increased markedly in recent quarters.

Lagarde forecasts wage growth will moderate and worker productivity will improve during the year, easing labor cost pressures on companies.

Data released last week showed eurozone inflation accelerated for the first time this year to 2.6% in May, after slowing from a peak above 10% in 2022. .

Raising its forecast for this year and next, the ECB said inflation will average 2.5% in 2024, 2.2% in 2025 and 1.9% in 2026.

“The statement is said to give less guidance than can be expected about what happens 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 rushing to loosen policy.”

The euro rose 0.2% to $1.0888 after the ECB announcement.

The interest rate-sensitive two-year German Bund yield – a benchmark for the Eurozone – edged higher to 3.02%, 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 previous decisions to ease monetary policy by central banks in Brazil, Mexico, Chile, Switzerland and Sweden This year.

In contrast, the US Federal Reserve is expected to keep interest rates unchanged next week at a 23-year high of 5.25 to 5.5% after price pressure in the world’s largest economy proved tougher than expected.

The Bank of England is also considered unlikely to lower banking interest rates from a 16-year high of 5.25% when it meets on June 20.

The ECB has raised its growth forecast for this year from 0.6% to 0.9%. It is expected to grow 1.4% next year and 1.6% in 2026.


News 7F: Update the world's latest breaking news online of the day, breaking news, politics, society today, international mainstream news .Updated news 24/7: Entertainment, the World everyday world. Hot news, images, video clips that are updated quickly and reliably

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button