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The European Central Bank has cut interest rates for the first time in nearly five years, moving faster than its US and UK counterparts in lowering borrowing costs after the biggest price surge for a generation.
The ECB lowered its benchmark deposit rate by a quarter percentage point to 3.75 per cent after its governing council met in Frankfurt on Thursday.
The euro held steady, rising 0.1 per cent to $1.0865 after the rate announcement.
Interest rate-sensitive two-year German Bund yields — a benchmark for the Eurozone — edged higher to 3.02 per cent, up 0.05 percentage points on the day.
Traders in swaps markets slightly lowered their bets on a second cut by September to 65 per cent, from 70 per cent ahead of the announcement.
The bank said it would take a “data-dependent and meeting-by-meeting approach” to future policy decisions and it was “not pre-committing to a particular rate path”.
Noting that inflation had fallen more than 2.5 percentage points since its last rate increase in September 2023, the ECB said high borrowing costs had “made a major contribution to bringing inflation back down”.
It was “now appropriate to moderate the degree of monetary policy restriction” in response to inflation’s decline, the bank added.
ECB president Christine Lagarde will explain the decision at a press conference later in the day. Lagarde said last month she was “really confident” Eurozone inflation was under control after it slowed from a peak above 10 per cent in 2022 to within a whisker of its 2 per cent target.
However, data released last week showed inflation accelerated for the first time this year to 2.6 per cent in May. The ECB said: “Despite the progress over recent quarters, domestic price pressures remain strong as wage growth is elevated, and inflation is likely to stay above target well into next year”.
Raising its forecasts, the ECB said inflation would average 2.5 per cent this year, 2.2 per cent next and 1.9 per cent in 2026.
Thursday’s move came a day after a similar rate cut by the Bank of Canada and follows earlier decisions to ease monetary policy by central banks in Brazil, Mexico, Chile, Switzerland and Sweden this year.
By contrast, the US Federal Reserve is expected to keep rates on hold next week at a 23-year high range of 5.25 to 5.5 per cent after price pressures in the world’s biggest economy proved more stubborn than expected.
The Bank of England is also considered unlikely to lower its bank rate from a 16-year high of 5.25 per cent when it meets on June 20.
