Amid Inflation Concerns, European Central Bank Confirms Interest Rate Cut, First Time Since 2019

Amid Inflation Concerns, European Central Bank Confirms Interest Rate Cut, First Time Since 2019

The European Central Bank (ECB) on Thursday confirmed a widely anticipated reduction in interest rates, despite persistent inflationary pressures in the 20-nation euro zone, CNBC reported. This decision lowers the central bank’s key rate to 3.75 per cent, down from a record high of 4 per cent, where it had remained since September 2023.

“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,” the ECB Governing Council said.

In the updated macroeconomic projections, ECB staff revised their annual average headline inflation forecast for 2024 to 2.5 per cent, up from the previous 2.3 per cent. The 2025 inflation outlook was also increased to 2.2 per cent from 2 per cent, while the 2026 projection remained at 1.9 per cent.

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Financial markets had fully anticipated the 25 basis point reduction at the June meeting, marking the first rate cut since September 2019, when the deposit facility was in negative territory. Currently, markets have only fully priced in one more reduction this year. However, economists polled by Reuters last week predict two additional cuts over the period.

A follow-up cut at the ECB’s next meeting in July was already considered unlikely but has now been all but ruled out by the latest figures, according to Dean Turner, chief euro zone economist at UBS Global Wealth Management. “The slight upgrade to the inflation forecast was to be expected, inflation has been printing a little bit hotter than markets were expecting, but in terms of the timing of the next cut I’d still be looking to September,” Turner told CNBC.

Despite the ECB’s late start in hiking interest rates, the June cut positions it ahead of the US Federal Reserve, which continues to grapple with US inflation. Canada on Wednesday became the first G7 nation to cut interest rates in the current cycle, with Sweden and Switzerland’s central banks having already announced their own rate reductions this year.

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