The European Central Bank has eased pressure on borrowers across the eurozone by cutting its main interest rate for the first time in almost five years.
Citing a sustained fall in inflation, the ECB announced a cut in its deposit rate to 3.75% from a record high of 4%. This puts it ahead of the US Federal Reserve and the Bank of England, which have yet to cut interest rates.
Financial markets eagerly anticipated the first eurozone cut since September 2019. This will also affect the ECB’s main refinancing operations rate, which fell from 4.5% to 4.25%.
City analysts had forecast the cut in borrowing costs at the ECB’s June meeting, following signals that the central bank was ready to offer more support to eurozone economies following a period of economic stagnation following the Russian invasion of Ukraine.
The ECB stated: “Keeping interest rates high for nine months has helped push down inflation. It is now appropriate to moderate the degree of monetary policy restriction.”
Dean Turner, the chief eurozone economist at UBS Global Wealth Management, said the inflation outlook, indicated by the ECB’s latest projections, points to further interest rate reductions later this year.
Turner said: “Of course, the timing of the next move from the ECB is uncertain, as this will be dependent upon incoming data. But with the disinflationary process firmly under way, the ECB, along with other central banks, should feel confident enough to ease policy, most likely at a pace of one cut per quarter.”
However, the ECB expects inflation to be marginally higher this year and in 2025 than it forecasted in March. It said inflation would average 2.5% in 2024 and 2.2% in 2025, up from its previous forecast of 2.3% and 2%, respectively.