European Central Bank cuts interest rates

The ECB Governing Council reduced the refinancing, deposit, and marginal lending rates by 25 basis points to 4.25 percent, 3.75 percent, and 4.50 percent, respectively.

The decision statement included the following: "We will keep rates sufficiently restrictive for as long as necessary. The Governing Council will continue to follow a data-dependent and meeting-by-meeting approach to determine the appropriate level and duration of restriction.

The Governing Council is not pre-committing to a particular rate path."

FIRST CUT SINCE 2016

This marks the first cut for both the refinancing rate and the marginal lending rate since March 2016. For the deposit rate, it is the first reduction since September 2019.

While the Fed sends messages that it will keep rates high until it obtains more evidence that inflation in the US is moving toward its target, it is anticipated that the ECB's interest rate cut could create downward pressure on the euro.

With the ECB lowering interest rates by 25 basis points each, the gap between Eurozone and US interest rates will also widen.

ANNUAL INFLATION IN THE EUROZONE HAD EXCEEDED EXPECTATIONS

ECB officials, led by ECB President Christine Lagarde, had emphasized that they were comfortable with diverging from the Fed, even if there is a risk of a weaker currency that could trigger inflation. Data released on May 31 revealed that consumer prices in the Eurozone exceeded expectations in May, rising 2.6 percent on an annual basis.

Bloomberg Economics had expected a 25-basis-point cut from the ECB in June and announced that they projected further cuts of the same magnitude in September, October, and December, following a pause in July.

However, on March 20, Lagarde stated that the ECB would likely have enough confidence to decide on the first interest rate cut in June 2024, adding, "We cannot pre-commit to a particular rate path after the first rate cut."

Bundesbank President and ECB Governing Council member Joachim Nagel had expressed in March that inflation in the Eurozone could be stubborn, stating that the ECB could not make commitments regarding what would happen after a possible first rate cut in June.

The decision by the ECB—one of the world's most important central banks, responsible for managing the monetary policy of the 20 countries in the Eurozone—to lower interest rates is expected to be a turning point in the fight against high inflation, which has occupied monetary policy officials for more than two years, as it will make borrowing for homes or consumer goods cheaper.

News Source: 12punto