The European Central Bank (ECB) cut its main interest rate by a quarter point or 25 basis points to 3.75% from a previous high of 4%. This move precedes actions by the US Federal Reserve, reflecting a global trend of central banks lowering borrowing costs. The adjusted interest rates are as follows:
- Main Refinancing Operations: 4.25%
- Marginal Lending Facility: 4.50%
- Deposit Facility: 3.75%
The ECB cut its benchmark rate to 3.75% from a record high of 4% at a meeting of the bank’s 26-member rate-setting council in Frankfurt.
The ECB said in a statement that “price pressures have weakened, and inflation expectations have declined at all horizons,” allowing it to start loosening credit.
The bank warned, however, that “wage growth is elevated, and inflation is likely to stay above target well into next year.” It declined to signal how far or how fast it might cut, saying it would decide meeting by meeting.
Why did the ECB cut interest rates?
The ECB’s previous actions, including a total increase of 450 basis points between July 2022 and September 2023, have contributed to a significant decline in eurozone headline inflation from its peak of 10.6% in October 2022 to 2.6% in May 2024. While inflation has not yet reached the 2% target, its substantial decrease suggests a continuing downward trend expected to persist.
According to the latest ECB projections, both headline and core inflation for 2024 and 2025 have been revised upward compared to previous estimates. Economic growth is also forecasted to improve in the coming years.
Analysts do not anticipate further rate cuts in the immediate future, as the ECB monitors inflation levels while adjusting credit policies to support the economy. Despite a decline in inflation from its peak, certain sectors still experience elevated prices.
“While inflation at an annual rate of 2.6% in May is well down from peak of 10.6% in October 2022, the decline has slowed in recent months and inflation even ticked up slightly from 2.4% in April,” state news agency WAM reported. “Inflation in the services sectors, a broad category that includes everything from medical care and haircuts to hotels, restaurants and concert tickets, remains elevated at 4.1%.”
The ECB’s decision reflects a global trend of central banks considering interest rate reductions. Lower rates have various implications for consumers, investors, and businesses, affecting borrowing costs, stock prices, and economic growth.
The ECB’s previous higher rates had repercussions on eurozone home prices, construction activity, and renewable energy projects. Following the ECB’s decision, the Euro rallied, with the EUR/USD pair rising to 1.0880. Euro area sovereign bond yields increased, and European equities trimmed session gains despite the Euro Stoxx 600 index reaching record highs earlier in the day.