ECB Cuts Rates for First Time in 5 Years

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Facts

• The European Central Bank (ECB) on Thursday cut interest rates for the first time since 2019 during its meeting in Frankfurt, Germany. The widely expected move brings the central bank’s rate down to 3.75%.¹
• Rates had been at an all-time high of 4% before the 0.25 percentage point reduction. The 26-member rate-setting committee decided that inflation had eased enough to start lowering rates, even if annual inflation (2.6%) remains above the ECB’s 2% target.²
• While ECB Pres. Christine Lagarde expects inflation to remain above 2% for the foreseeable future, projecting 2.5% this year and 2.2% in 2025, she says the outlook has improved “markedly.” She added that the ECB is not “pre-committing to a particular rate path.”³
• ECB staff projects 1.9% inflation in 2026. All but one of the 20 national representatives at the meeting approved the rate cut, with the committee set to reconvene in July.⁴
• Canada’s national bank also cut rates on Wednesday, becoming the first G7 entity to do so. Meanwhile, the US Federal Reserve — scheduled to hold a policy-setting meeting next week — hasn’t yet cut rates amid its battle with inflation.⁵
• Analysts expect the Fed to cut rates at some point in 2024. While not in lockstep, it is unlikely that ECB policymakers will want to move too far ahead of the US’ and other central banks.⁶

Sources: ¹NBC, ²Associated Press, ³BBC News, ⁴CNBC, ⁵Forbes and ⁶CNN.

Narratives

• Narrative A, as provided by The Street. The EU has been one of the first major players to lower its interest rates, and the ECB’s decision could prompt the Fed to follow suit. Canada and other European countries have also trimmed their key rates in recent months, and it’s about time the US does the same. The Eurozone has dealt with the same inflationary pressures that the US has, if not worse, and it still managed to lower record-high interest rates. The pressure is now on Jerome Powell to act.
• Narrative B, as provided by Bloomberg. While the ECB’s move to cut interest rates is certainly welcomed, it is unlikely to make a major impact on the world economy since the Fed still runs the show. The US central bank has maintained its restrictive policy as it seeks to reach its 2% inflation goal. That, as well as other economic and social factors, will motivate Jerome Powell, not the decisions of his international peers.

Predictions