The European Central Bank (ECB) has made a bold move by cutting interest rates for the first time in nearly five years, outpacing its US and UK counterparts. The decision was made in response to a significant drop in inflation since the last rate increase in September 2023.
ECB President Christine Lagarde announced that the bank had lowered its benchmark deposit rate by a quarter percentage point to 3.75 per cent after a meeting in Frankfurt. Lagarde emphasized that while the bank was easing monetary policy, it was not committing to a specific rate path. She also highlighted that domestic price pressures remain strong due to elevated wage growth, and inflation is expected to stay above target well into next year.
The move by the ECB comes amidst a global trend of central banks easing monetary policy. The Bank of Canada recently made a similar rate cut, and other central banks in Brazil, Mexico, Chile, Switzerland, and Sweden have also taken steps to ease policy this year.
Despite the ECB’s decision, the US Federal Reserve is expected to keep rates on hold at a 23-year high range of 5.25 to 5.5 per cent, as inflation in the US has proven to be more stubborn than anticipated. Similarly, the Bank of England is unlikely to lower its bank rate from a 16-year high of 5.25 per cent at its upcoming meeting.
The ECB also revised its growth forecast, expecting 0.9 per cent growth this year, 1.4 per cent next year, and 1.6 per cent in 2026. The euro nudged higher after the announcement, and interest rate-sensitive two-year German Bund yields also edged higher.
Overall, the ECB’s decision to cut interest rates reflects a cautious approach to managing inflation and economic growth in the Eurozone.