ECB Cuts Interest Rates to 3.75%, First Reduction Since 2019

The European Central Bank reduced its key interest rate to 3.75%, marking the first cut since 2019 amid ongoing inflation concerns.
ECB Cuts Interest Rates to 3.75%, First Reduction Since 2019

Key Takeaways

  • ECB cuts key interest rate to 3.75%, first reduction since 2019.
  • Revised inflation projections for 2024 and 2025 indicate slight increases.
  • Future rate cuts will be data-dependent, with the next reduction unlikely before September.

The European Central Bank (ECB) announced a highly anticipated reduction in interest rates on Thursday, marking the first cut since 2019. The bank’s key rate is now set at 3.75%, down from the previous record high of 4% maintained since September 2023.

The ECB Governing Council stated:

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.

ECB staff revised their inflation projections, raising the 2024 average to 2.5% from 2.3% and the 2025 forecast to 2.2% from 2%. The 2026 outlook remains unchanged at 1.9%.

While money markets had fully priced in the 25 basis point reduction, economists are divided on the future path of rate cuts. A follow-up cut in July is unlikely, but further reductions could occur in September, according to Dean Turner, chief euro zone economist at UBS Global Wealth Management.

Christine Lagarde, President of the ECB, emphasized the importance of data dependency in future decisions. She noted:

At each and every step of the way when we reassessed and decided to move in a different direction, we have halved inflation.

Italy’s Finance Minister Giancarlo Giorgetti expressed hope for continued monetary easing, while former ECB Vice President Vitor Constâncio suggested that further cuts might be justified despite recent inflation upticks.

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