In a decisive move to stimulate economic growth, the European Central Bank (ECB) has reduced interest rates by 25 basis points for the first time in five years.
This decision, announced during a governing council meeting in Frankfurt on Thursday, marks a significant shift in the ECB’s monetary policy.
The reduction lowers borrowing costs across the eurozone from a record high of 4% to 3.75%. The ECB now joins other central banks, including those in Canada, Sweden, and Switzerland, in cutting rates ahead of the influential US Federal Reserve. Earlier today, money markets had indicated a 92% probability of a rate cut, with only an 8% chance of no change. This cut is the first since September 2019.
The ECB also lowered the interest rate on the main refinancing operations from 4.5% to 4.25%. This rate is crucial as it determines the cost for banks when they borrow money from the ECB for one week. Additionally, the marginal lending facility rate, another key interest rate, has been reduced from 4.75% to 4.5%.
This move comes amid significant progress in the ECB’s efforts to combat high inflation across the eurozone. Inflation has cooled from more than 10% in late 2022 to 2.6% in the year to May, now sitting just above the ECB’s 2% target. This is the lowest inflation rate since July 2021.
In a statement, the ECB explained its decision: “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.”
The ECB’s revised forecasts for inflation in 2024 and 2025 suggest a cautious but optimistic outlook for the eurozone economy. The central bank’s proactive stance aims to balance the need for economic growth with the goal of maintaining price stability.
This rate cut is expected to provide much-needed relief to businesses and consumers by reducing borrowing costs and encouraging investment. As the eurozone navigates through economic uncertainties, the ECB’s actions underscore its commitment to fostering a stable and conducive economic environment.
