European Central Bank cuts interest rate for the first time since 2019 by 25 bps

The European Central Bank (ECB) has reduced interest rates for the first time since 2019, lowering the key deposit rate by a quarter point to 3.75%. This move comes as inflation in the eurozone gradually eases, following a series of rate hikes initiated in mid-2022 to combat surging energy and food prices. Despite the reduction, ECB President Christine Lagarde warned of an uncertain path ahead, describing it as a "bumpy road."

ECB cuts interest rate

The ECB's decision marks a divergence from the US Federal Reserve, which, despite aggressive rate hikes, is not expected to start cutting rates for several months due to robust economic data. Lagarde emphasized that the ECB is not "pre-committing to any particular rate path," acknowledging the unpredictability of the journey towards economic stability.

Updated forecasts from the ECB reflect ongoing challenges. The central bank has raised its inflation projections for this year and next, now expecting inflation to reach 2.2% in 2025, rather than hitting the two-percent target. Additionally, the growth forecast for 2024 has been revised upward, while slightly lowering it for the following year.

Recent data showed a faster-than-expected rise in inflation to 2.6% year-on-year in May, and stronger-than-anticipated economic expansion in the first quarter. Although inflation has moderated, Lagarde noted that wage growth remains elevated but is expected to ease throughout the year.

Lagarde also highlighted risks to the eurozone economy, including a weaker global economy, escalating trade tensions, and geopolitical uncertainties stemming from conflicts in Ukraine and the Middle East.

Analysts suggest the ECB might reduce rates every other meeting, aligning with their updated projections. However, ING economist Carsten Brzeski cautioned that negative inflation surprises could alter this trajectory. Concerns persist about the ECB's faster rate cuts compared to the Federal Reserve, potentially leading to a depreciating euro and higher import costs, which could fuel inflation.

[With AP inputs]

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