The European Central Bank (ECB) has decided to change course and is cutting interest rates for the first time in almost five years. The monetary authorities around central bank president Christine Lagarde have lowered the key interest rate by 0.25 percentage points to 4.25 percent, as the ECB announced in Frankfurt on Thursday. The deposit rate, which is the key rate on the financial market and which banks receive for parking money with the central bank, has been reduced to 3.75 percent from the previous 4.00 percent. The last time the central bank cut interest rates was in September 2019. “The ECB Governing Council does not commit itself to a specific interest rate path in advance,” the ECB now explained with a view to the future course.
With its step down, the ECB follows the central banks in Canada, Switzerland and Sweden, which have already cut interest rates. The influential US Federal Reserve is still keeping its feet on the ground because inflation in the United States has recently proven to be very high.
Inflation has not yet been defeated in the euro zone either. However, with inflation most recently at 2.6 percent in May, rates of more than ten percent, as in autumn 2022, are now a long way off. Ten interest rate hikes by the ECB since summer 2022 have also contributed significantly to this. The ECB is aiming for an inflation rate of 2.0 percent, which it considers to be the optimal level for the 20-country community.
ECB chief economist Philip Lane recently signaled clearly that the central bank could ease its tight interest rate policy somewhat. At the same time, however, he also made it clear that the fight against inflation is not over with a rate cut.
In the latest survey by the Reuters news agency, all 82 economists surveyed had expected an interest rate cut of 0.25 percentage points. However, they also expected the euro watchdogs to take a cautious approach in the coming months. This is also likely due to the fact that wage growth in the first quarter was surprisingly strong and inflation in services remains high. The financial market had recently expected a maximum of two further interest rate cuts this year.