In news that will warm the cockles of continental investors, the European Central Bank (ECB) has slashed interest rates for the first time in nearly five years.
Thursday's quarter-point cut brings the rate to 3.75%, down from 4%, and follows Canada’s central bank decision to cut rates for the first time since March 2020, the advent of the COVID-19 pandemic, from 5% to 4.75%.
The decision follows a substantial decrease in Eurozone inflation, which has fallen more than 2.5 percentage points since the ECB’s last rate hike in September 2023.
On track to tackle inflation
An ECB council member affirmed the bank’s growing confidence in achieving its inflation targets, saying: “There was widespread agreement that we are on track to bring inflation down to our target, and confidence is growing in our forecasts that should allow us to keep bringing rates down.”
ECB President Christine Lagarde hinted at a “strong likelihood” that this decision marks the beginning of a gradual reduction from the historically high rates, though she hedged that any future rate adjustments would be contingent on incoming economic data.
Despite the move, several members of the ECB’s governing council expressed scepticism about another rate cut in the near term, citing recent inflation and wage growth increases.
What's next?
The probability of a second cut by September, according to traders in the swaps markets, has dropped from 70% to close to 60%.
The ECB remains cautious, stating it is “not pre-committing to a particular rate path” and expects inflation to remain above its 2% target until the last quarter of 2025.
The decision has not yet been mirrored by central banks in the US, UK, NZ or Australia, and it remains to be seen whether it will spur a similar course of action in those economies.