Yahoo Finance ECB cuts interest rates for first time in five years to 3.75%
European Central Bank follows Canada, Sweden and Switzerland in cutting rates — moving ahead of the Federal Reserve
The European Central Bank (ECB) has cut interest rates, by a quarter-point, for the first time in five years at its governing council meeting in Frankfurt. It also raised its forecasts for inflation this year and in 2025.
As widely expected, borrowing costs across the eurozone have been lowered from record highs of 4% to 3.75%, with the ECB joining the central banks of Canada, Sweden and Switzerland in cutting rates — moving well ahead of the influential US Federal Reserve.
Earlier today, money markets pointed to a 92% probability of a rate cut, with just an 8% chance of no change. It is the first rate cut since September 2019.
It also lowered the interest rate on the main refinancing operations, which is the rate banks pay when they borrow money from the ECB for one week, from 4.5% to 4.25%
Its third key interest rate, the marginal lending facility, has been lowered from 4.75% to 4.5%.
This comes as the bank has made progress in its battle against high inflation across the eurozone, which has cooled from more than 10% in late 2022 to 2.6% in the year to May. This is now sitting just above the 2% target at its lowest point since July 2021.
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In a statement the ECB said: "The governing council today decided to lower the three key ECB interest rates by 25 basis points.
"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."
What had looked like the start of a major easing cycle only a few weeks ago, however, now appears more uncertain amid signs that inflation may prove stickier than expected in the euro area, as has been the case in the United States.
"Further cuts in September and December remain our central case," HSBC economist Fabio Balboni said in a note. "But if the recent resilience in services inflation proves sustained, we see increasing chances that the ECB might have to be more cautious on the way down."
Most economists still expected two further rate cuts by the end of the year, but markets only price one to two more moves. This is a big change compared with the start of the year when over five rate cuts were seen in 2024.
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Also on Thursday, the ECB forecast that headline inflation will average 2.5% in 2024, and then drop to 2.2% in 2025. Three months ago, inflation was expected to average at 2.3% in 2024, before falling to the 2% target in 2025.
Policymakers still expect inflation to drop to 1.9% in 2026.
The Bank of England (BoE) is now under pressure to align closely with the ECB’s rate action and has its next Monetary Policy Committee meeting in two weeks.
However prime minister Rishi Sunak’s decision to call a general election for 4 July means the City now expects a rate reduction later in the summer once voting is over. September is now seen as most likely timing.
But James Smith, developed markets economist at ING, said: “Don’t assume the Bank won’t move in June just because there’s an election coming.
“BOE independence is a well-established and respected principle among the major parties, and a rate cut has been telegraphed long before the election was called.”
Watch: How does inflation affect interest rates?
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