The European Central Bank (ECB) has announced its first interest rate cut in nearly five years, whittling down its key rate to 3.75% from the record high 4.0% level reached last September.
“Based on an updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission, it is now appropriate to moderate the degree of monetary policy restriction after nine months of holding rates steady,” said the ECB in a press statement. “Since the Governing Council meeting in September 2023, inflation has fallen by more than 2.5 percentage points and the inflation outlook has improved markedly. Underlying inflation has also eased, reinforcing the signs that price pressures have weakened, and inflation expectations have declined at all horizons. Monetary policy has kept financing conditions restrictive. By dampening demand and keeping inflation expectations well anchored, this has made a major contribution to bringing inflation back down.”
The ECB, which has not enacted a rate cut since September 2019, added it remained focused on ensuring “that inflation returns to its 2% medium-term target in a timely manner. It will keep policy rates sufficiently restrictive for as long as necessary to achieve this aim.”
Today’s announcement follows yesterday’s news that the Bank of Canada reduced its main interest rate by 25 basis points to 4.75%, its first rate cut in four years and the first rate cut this year enacted by a G7 nation. The central banks in Switzerland, Sweden, Czechia and Hungary have also cut their rates.
What impact any of this will have on the Federal Reserve is unclear; traditionally, central banks around the world have followed the Fed’s example on monetary policy. The U.S. central bank’s policy making Federal Open Market Committee will meet next Tuesday and Wednesday to determine the status of its rates. Last month, Fed Chairman Jerome Powell insisted a rate cut was not on the near horizon, stating that the current pace of the downward motion did not warrant a rate cut while insisting the Fed will “need to be patient and let restrictive policy do its work.”
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