(Frankfurt) The European Central Bank (ECB) lowered its key interest rate by a quarter of a percentage point on Thursday, the day after an identical announcement by the Bank of Canada.
The ECB cut its policy rate to 3.75% at a meeting of its 26-member rate-setting council in Frankfurt. The old rate of 4% was a record.
At a press conference, ECB President Christine Lagarde said inflation had eased enough for the central bank to start cutting rates.
Due to annual inflation of 2.6% in May, which is expected to remain above the ECB’s 2% target next year, Lagarde declined to indicate how quickly and to what extent the bank could lower rates in the coming months.
“We will keep policy rates sufficiently restrictive for as long as necessary,” she said. We are not committed to a particular rate trajectory.
On Wednesday, the Bank of Canada announced it was cutting its benchmark rate by 0.25 percentage points to 4.75%. It was the first G7 central bank to do so since the meteoric increase in key rates.
Rate hikes combat inflation by making it more expensive to borrow to buy goods, reducing demand and easing price pressures. On the other hand, high rates are a drag on the stagnant eurozone economy.
Analysts say the ECB is unlikely to change its rate at its next meeting on July 18, pending confirmation that inflation is under control.
“Today’s reduction does not necessarily mark the start of a cycle of easing,” said Carsten Brzeski, global head of macroeconomics at Dutch banking firm ING.
Although annual inflation in May was lower –– by far – than the peak of 10.6% reached in October 2022, the decline has slowed in recent months. Inflation even increased slightly compared to April, when it stood at 2.4%. It remains particularly high in the service sectors, at 4.1%.
