European Central Bank To Cut Rates For First Time Since 2019

The European Central Bank (ECB) is set to announce a reduction in interest rates at its meeting in Frankfurt, Germany on Thursday.

This rate cut, the first since 2019, comes despite persistent inflationary pressures in the eurozone. European stocks rose in anticipation of the ECB announcement, with the euro also trading higher against the British pound and the U.S. dollar.

ECB policymakers have signalled their intention to lower borrowing costs after seeing inflation fall from over 10% in late 2022 to just above their 2% target in recent months. The decline in inflation made the bank consider undoing the steepest series of rate hikes in its history. The hikes were initially implemented in response to soaring prices following Russia’s invasion of Ukraine.

RATE PREDICTIONS

The central bank’s key rate has reached a record 4% since September 2023. All 82 economists polledby Reuters expect the ECB to trim its deposit rate to 3.75%. Most predicted further cuts by the end of the year.

ECB chief economist Philip Lane has already stated that a rate cut would not be a “declaration of victory” and that the pace of further reductions would depend on domestic inflation and demand.

Recent data has shown stronger-than-expected inflation in the services sector, with price growth rebounding to 4.1% in May from 3.7% in April. This increase is likely due to higher-than-expected wage growth in the first quarter, which boosted consumers’ disposable income after years of below-inflation pay hikes.

The ECB will now join the central banks of Canada, Sweden, and Switzerland in cutting rates. The bank is expected to release quarterly projections on economic growth and inflation, which investors will closely watch.

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