ECB reduces interest rates for the first time since 2019

The European Central Bank (ECB) has cut interest rates by 25 basis points at its June meeting, as was widely expected by analysts, in the first reduction since September 2019.

The move was anticipated by market participants after prior communication from Frankfurt policymakers. This decision aims to moderate the extent of monetary policy restrictions following nine months of steady rates.

The ECB reduced its main refinancing rate to 4.25%, the marginal lending rate to 4.50%, and the deposit rate to 3.75%, with effect from 12 June 2024.

This marks the first cut since March 2016 for both the main refinancing operations rate and the marginal lending rate while, for the deposit rate, it is the first reduction since September 2019.

"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," an ECB press statement said.

According to the ECB, the overall increase of 450 basis points implemented by Frankfurt between July 2022 and September 2023 has contributed to bringing down the headline inflation rate in the Eurozone from a peak of 10.6% in October 2022 to 2.6% in May 2024.

While inflation has not yet completely met the 2% target, its substantial decrease signals a continuing downward trend expected to persist in the coming months.

According to the latest ECB projection, the latest Eurosystem staff projections for both headline and core inflation have been revised up for 2024 and 2025 compared with the March projections.

Staff now see headline inflation averaging 2.5% in 2024, 2.2% in 2025 and 1.9% in 2026. For inflation excluding energy and food, staff project an average of 2.8% in 2024, 2.2% in 2025 and 2.0% in 2026. Economic growth is expected to pick up to 0.9% in 2024, 1.4% in 2025 and 1.6% in 2026.

Will the ECB continue to cut rates after June?

Recent remarks from ECB officials suggest that there will be no pre-commitment to future cuts afterwards.

This means that a further rate cut in July remains uncertain, as the ECB aims to retain flexibility in its decisions and continue monitoring economic data.

Eurozone inflation edged higher in May, reaching 2.6%, above the expected 2.5%, while core inflation rose to 2.9% from 2.7% in April.

President Lagarde is likely to signal once again that more information will be available in July to guide the next decision, with even greater clarity expected by September.

(Source: Euronews)