The European Central Bank (ECB) on Thursday announced a quarter-point interest rate cut.
The rate was lowered to 3.75%. This is the first reduction in five years.
The eurozone has been grappling with inflation in the wake of the COVID-19 pandemic and Russia’s invasion of Ukraine.
Rates had been on hold since October.
The ECB put in place several interest rate hikes starting in mid-2022.
What did the ECB say about the cut?
Inflation is projected to reach 2.5% in 2024. The ECB had previously foreseen an inflation rate of 2.3%.
It is expected to fall to 2.2% in 2025 and 1.9% in 2026, according to projections published on Thursday.
The eurozone’s economy is expected to expand by 1.4% in 2025, one point lower than what was predicted in March. In 2026, it could reach 1.6%.
The ECB said that “price pressures have weakened, and inflation expectations have declined at all horizons.”
“The inflation outlook has improved markedly,” it said.
However, it said that high prices continued to put pressure on consumers despite increases in wages.
“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.”
No quick cuts expected
The bank said that decisions will continue to be made based on the inflation outlook.
“[The ECB] will keep policy rates sufficiently restrictive for as long as necessary,” it said.
“The Governing Council will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction,”
ECB chief Christine Lagarde said at a press conference that the speed of future cuts is “very uncertain.”
“What is very uncertain is the speed at which we travel and the time that it will take,” she said, adding there could be “bumps on the road.”
Analysts say the reduction on Thursday is unlikely to be followed by a series of fast cuts.
“The immediate tone is a ‘hawkish cut.’ This is not a central bank in a rush to ease policy,” Deutsche Bank economist Mark Wall was cited by the Reuters news agency as saying.
“Sticky inflation will limit the room for additional rate cuts and the ECB’s statement also doesn’t give away any hints at the future path of the ECB,” economist Carsten Brzeski of ING stressed in comments to Agence France-Presse (AFP).
The US Federal Reserve has signaled a delay in rate cuts over stubborn inflation. The ECB could seek to slow its own cuts to avoid weakening the euro.
sdi/nm (AFP, AP, Reuters)