The markets see two more rate cuts from the ECB this year, following a first rate cut in nearly five years from the committee on Thursday. It is expected that the cut would be in September and December.
The European Central Bank (ECB) yesterday confirmed the widely-anticipated reduction in interest rates during its meeting, despite the presence of inflationary pressures within the 20-nation euro zone. This move lowered the central bank’s key rate to 3.75%, decreasing from the record level of 4% maintained since September 2023.
In the updated macroeconomic projections, closely monitored by investors, ECB staff increased the estimated average headline inflation for 2024 to 2.5% from the previous 2.3%. Additionally, they raised the 2025 forecast to 2.2% from 2%, while maintaining the 2026 projection at 1.9%.
The 25 basis point rate decrease was entirely factored in by money markets at the June meeting, marking the first reduction since September 2019 when the deposit facility was in negative territory.
As money markets anticipate two more cuts this year, the ECB stated that interest rate decisions will be determined by evaluating the inflation outlook alongside economic and financial data, underlying inflation trends, and the effectiveness of monetary policy transmission,” the ECB stated. “The Governing Council has not committed to a specific rate trajectory.”
Conservative policymakers, who still hold sway on the Governing Council responsible for setting rates, argue that there is no rush to cut rates as the economy’s resurgence indicates that high rates are not hindering growth. Their cautious approach could partly stem from the unexpectedly persistent inflation levels.
