The European Central Bank cut interest rates Thursday, moving before the US Federal Reserve and the Bank of England to lower borrowing costs as inflation recedes following years of rate hikes.
The first ECB rate cut in nearly five years takes the benchmark rate in the 20 countries that use the euro down to 3.75% from an all-time high of 4%, where it had stood since September.
The central bank cautioned that the fight to control price rises wasn’t completely over yet, and that it wasn’t yet committed to further rate cuts.
“Despite the progress over recent quarters, domestic price pressures remain strong as wage growth is elevated, and inflation is likely to stay above target well into next year,” the ECB said in a statement.
Major central banks started raising borrowing costs in late 2021 in response to sky-high inflation, largely driven by the end of the pandemic and the energy shock caused by Russia’s invasion of Ukraine.
But price rises in the eurozone, the United States and the United Kingdom have since slowed, bringing the annual inflation rate closer to the 2% targeted by their respective central banks.
The ECB’s decision follows a rate cut by the Bank of Canada Wednesday, which became the first G7 central bank to reduce borrowing costs in the past few years. Central banks in Switzerland and Sweden have also cut interest rates this year.
ECB President Christine Lagarde will hold a press conference later Thursday.
Analysts doubt the central bank will cut rates again at its next meeting in July. Eurozone inflation ticked up more than expected in May, to 2.6% from 2.4% the previous month. Core inflation, which strips out volatile food and energy prices, also accelerated as wages grew rapidly.
On Thursday, the ECB raised its inflation forecast for this year, to 2.5% from the 2.3% predicted in March. It added that it would keep interest rates “sufficiently restrictive for as long as necessary” to return inflation to the 2% target.
The European economy, which only narrowly avoided a recession last year, is also showing signs of recovery, which could cause inflation to rise again.
In May, combined output in manufacturing and services hit a 12-month high, according to a survey of purchasing managers compiled by S&P Global and Hamburg Commercial Bank. Business confidence, meanwhile, reached its strongest level in more than two years.
Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, said the data “indicates… that the eurozone’s economy is gathering further strength.”
The ECB upgraded its forecast for this year’s economic growth to 0.9% from the 0.6% projected in March.
Another factor that could influence the central bank’s thinking is the timing of rate cuts by the Fed, expected later this year. Policymakers in Frankfurt may be hesitant to move too far ahead of the Fed as that could cause the euro to lose value against the dollar, which could then push up inflation in Europe by raising the price of imports.
Higher interest rates tend to attract more international capital flows into a country, lifting demand for its currency.
Traders are all but certain the Fed will keep rates on hold at its meeting next week. The Bank of England is likewise not expected to cut rates at its meeting on June 20, which comes just weeks before the United Kingdom holds a general election.
