As expected, the European Central Bank has cut borrowing costs for the euro area. This is the first interest rate cut since September 2019.

More specifically, the European Central Bank cut the key deposit rate to 3.75% from 4%, marking the start of the downward cycle.

Recall that in 14 months, interest rates had risen 10 times, reaching record levels, and for a further 9 months, they had remained unchanged.

At the same time, it is the first time in recent years that the European Central Bank has cut rates before the US Fed has cut its own dollar rates.

We cut our key interest rates by 0.25 percentage points.

Keeping interest rates high for nine months has helped push down inflation.

It is now appropriate to moderate the degree of monetary policy restriction.

Read our monetary policy decisions https://t.co/AaaLd3hGEB pic.twitter.com/dTTYKg7itm

— European Central Bank (@ecb) June 6, 2024

Relaxing announcements on the European Central Bank’s rationale are expected to be made by Christine Lagarde in a few hours.

Later today: watch live as ECB President Christine @Lagarde explains the latest monetary policy decisions. pic.twitter.com/6KWAkzXLws

— European Central Bank (@ecb) June 6, 2024

Today’s cut marks the end to the interest rate hikes that began after the pandemic as inflation soared. However, investors’ attention seems to have already begun to turn to what will happen in the next few sessions.

Eurozone inflation in May was slightly higher at 2.6%. In addition, negotiated wage growth accelerated again in the first quarter to 4.7% after 4.5% in Q4 2023.

Although a new rate cut in July cannot be ruled out, given recent comments from ECB policymakers, it does not seem very likely.

The ECB statement

The Governing Council decided today to cut the ECB’s three key interest rates by 25 basis points. In line with the updated assessment of the outlook for inflation, the dynamics of underlying inflation and the intensity with which monetary policy is transmitted, it now seems appropriate to moderate the degree of contractionary change in monetary policy after nine months of keeping interest rates fixed.

Since the September 2023 Board meeting, inflation has declined by more than 2.5 percentage points and the outlook for inflation has improved significantly.

Underlying inflation has also eased, reinforcing evidence that price pressures have eased, and inflation expectations have declined at all horizons. Monetary policy has kept financing conditions restrictive. The moderation in demand and the stabilisation of inflation expectations have made a significant contribution to bringing inflation back to lower levels.

At the same time, despite progress in recent quarters, domestic price pressures remain strong as the pace of wage growth is elevated, and inflation is likely to remain above target for much of next year as well.

The Eurosystem’s most recent expert projections for headline and core inflation have been revised upwards for 2024 and 2025 compared with the March projections. The experts now expect headline inflation to average 2.5% in 2024, 2.2% in 2025 and 1.9% in 2026. As for inflation excluding energy and food, they forecast it to average 2.8% in 2024, 2.2% in 2025 and 2.0% in 2026. Economic growth is expected to accelerate to 0.9% in 2024, 1.4% in 2025 and 1.6% in 2026.

The Board is committed to ensuring that inflation returns to its medium-term target of 2% in time. It will keep policy rates sufficiently restrictive for as long as deemed necessary to achieve this target.

See Also 

Tasos Birsim: The Mastermind Behind Andreas Papandreou’s Electoral Campaigns Has Passed Away

The Governing Council will continue to follow an evidence-based approach and take decisions on a meeting-by-meeting basis to determine the appropriate size and duration of the contractionary change in monetary policy.

In particular, its decisions on interest rates will be based on its assessment of the outlook for inflation in light of incoming economic and financial data, the dynamics of underlying inflation, and the intensity with which monetary policy is transmitted. The Board is not committed in advance to a specific path for interest rates.

The Governing Council also confirmed today that it will reduce the securities held by the Eurosystem under the Pandemic Exceptional Asset Purchase Programme (PEPP) by an average of EUR 7.5 billion per month in the second half of this year. The detailed terms of this reduction will be broadly similar to those applicable to the asset purchase programme (APP).