It’s official: The European Central Bank has cut interest rates, moving ahead of the U.S. Federal Reserve and the Bank of England.
The ECB’s governing council decided to cut rates by 25 basis points, based on an updated assessment of the inflation outlook and the strength of monetary policy transmission, the ECB said in a news release on June 6.
The move comes after nine months of holding rates steady. The changes to the three key interest rates — the main refinancing operations rate (4.25%), the marginal lending facility rate (4.5%) and the interest rate on the deposit facility (3.75%) — will take effect on June 12.
Inflation has fallen by more than 2.5 percentage points since September, reaching 2.6% in May, and the inflation outlook has improved, the ECB said. The institution’s officials expect headline inflation to average 2.5% in 2024, 2.2% in 2025, and 1.9% in 2026 — falling below the target of 2%.
The governing council “will keep policy rates sufficiently restrictive for as long as necessary to achieve this aim. The governing council will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction. In particular, its interest rate decisions will be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission,” the release said. “The Governing Council is not pre-committing to a particular rate path,” it added.
While money managers said the rate cut had been expected, they think the ECB will now hit pause once again.
“The ECB is moving ahead of the Fed and the BOE, which will make an announcement later this month,” said Garvan McCarthy, CIO for Europe, Middle East and Africa, and Asia at Mercer, which had assets under advisement of $16.2 trillion globally as of June 2023. “Its increasingly dovish language is reflective of the differing economic realities in Europe and other parts of the world,” McCarthy said in emailed comments.
“The ECB hopes its rate cut will stimulate fresh life into the European economy, which remains sluggish. This move should be supportive for equities and private equity dealmakers who will be looking across the region for opportunities, which has suffered a slowdown in recent years as a result of rising debt costs and investors’ concerns about the economic outlook,” McCarthy added.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, also highlighted the ECB’s move ahead of the BOE and the Fed, but added that “ECB policymakers are expected to hit the pause button now, as sticky inflation has returned as a worry. While rates went straight up like a rocket, they look likely to descend in bumpy fashion.”
Streeter said markets have been pricing in two to three cuts in total by the ECB this year, “but it’s looking unlikely that that policymakers will vote for another move lower next month. Caution is set to stay the name of the game, as they await fresh indications about inflation’s path.”
The decision will “raise hopes that U.K. interest rates will also be brought down sooner rather than later. The data coming in over the past few days has been more positive for the Bank of England, indicating that price pressures are easing. So an interest rate cut in August is still a very real possibility, although the financial markets have not been fully pricing in a cut until November,” Streeter added.
The ECB followed the Bank of Canada, which on June 5 cut its policy rate by 25 basis points. The target for the overnight rate is now 4.75%, the bank rate is 5% and the deposit rate is 4.75%.
