ECB cuts interest rates for the first time in five years

The European Central Bank (ECB) has announced its first interest rate cut in five years, reducing rates by 25 basis points. This decision, made earlier today, was widely anticipated despite ongoing inflation pressures within the 20-nation eurozone.

Also Read: ECB and the inflation race: Time to play catch-up?

The central bank’s key rate is now 3.75%, down from a record 4% where it has stood since September 2023. According to a statement from the central bank’s governing council, “Based on an updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission, it is now appropriate to moderate the degree of monetary policy restriction after nine months of holding rates steady.”

ECB expects rapid GDP growth

The ECB’s updated macroeconomic projections are crucial for investors. ECB staff have raised their annual average headline inflation outlook for 2024 to 2.5%, up from the previous forecast of 2.3%. For 2025, the inflation forecast has been adjusted to 2.2%, up from 2%. The projection for 2026 remains unchanged at 1.9%.

In terms of GDP growth, the ECB expects the eurozone to grow by 0.9% in 2024, 1.4% in 2025, and 1.6% in 2026. These projections suggest a gradual improvement in economic conditions over the next few years, albeit at a modest pace.

Money markets had fully priced in the 25 basis point rate cut at the ECB’s June meeting. This is the first reduction since September 2019, a period when the deposit facility was in negative territory. Economists polled by Reuters last week predicted that there could be two more rate cuts over the coming months, even though markets have currently priced in only one further reduction this year.

All eyes are now on the U.S.

The ECB’s decision to cut rates comes ahead of the U.S. Federal Reserve, which has been slower to lower rates due to persistent inflation in the United States. In contrast, Canada became the first G7 nation to cut interest rates in the current cycle, making this move on Wednesday. Additionally, central banks in Sweden and Switzerland have already announced their own rate reductions this year.

Also Read: Europe’s economic problems are threatening to crush the ECB

ECB President Christine Lagarde highlighted during Thursday’s news conference that not all members of the Governing Council voted for the rate cut, although she did not disclose the identity of the dissenting member. She reiterated that the ECB aims to address inflationary concerns while managing economic growth.

Cryptopolitan reporting by Jai Hamid