First reduction in interest rates since 2019: ECB applies cut
The European Central Bank (ECB) takes the expected action: They decrease interest rates for the first time in five years. This was suggested earlier and most investors were prepared for it on the stock markets.
ECB decides to change direction and lowers interest rates by 0.25% to 4.25%, according to the announcement from the ECB in Frankfurt. The key interest rate, which banks get for leaving their money with the central bank, drops from 4% to 3.75%. The last time the central bank lowered interest rates was in September 2019. The ECB doesn't promise to maintain a specific interest rate path.
After this move, the ECB aligns with the central banks in Canada, Switzerland, and Sweden, which have already reduced interest rates. The influential US central bank, the Federal Reserve, has yet to take action, as US inflation has recently proven to be extremely high.
In the eurozone, inflation has not been beaten. The May inflation rate is 2.6%, and rates higher than 10%, as in the fall of 2022, are now a distant memory. This was also helped by the ECB's ten interest rate hikes since the summer of 2022. The ECB wants an inflation rate of 2.0%, which it believes is optimal for the 20-country community.
ECB's Chief Economist, Philip Lane, indicated quite clearly that the bank could soften its firm interest rate policy a bit. But he also made it clear that the battle against inflation was not yet over with a rate cut.
All 82 economists in the latest Reuters survey anticipated a 0.25% drop in interest rates. Nonetheless, they predicted a cautious approach from the eurozone's central bankers in the coming months. This could also be justified by the first-quarter being surprisingly strong on wage growth and high inflation in services. The financial markets speculated a maximum of two additional interest rate cuts this year.
Read also:
The decision to decrease interest rates by the ECB in Frankfurt am Main is driven by a desire to align with other central banks and combat persistently high inflation in the eurozone. With an interest rate reduction of 0.25%, Christine Lagarde, the head of the ECB, signals a slight softening in the bank's interest rate policy, but reiterates the importance of continuing the fight against inflation. Most economists, including those surveyed by Reuters, anticipated this 0.25% interest rate turnaround, suggesting a cautious approach from the ECB moving forward.
