European Central Bank Implements Expected Rate Cut Amid Lingering Inflationary Pressures

The European Central Bank (ECB) 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. 

The ECB Governing Council stated in a release that the decision to adjust the degree of monetary policy restraint after nine months of rate stability was based on a revised evaluation of the inflation outlook, underlying inflation dynamics, and monetary policy transmission strength.

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.

Although markets only fully anticipated one additional rate cut within the year, economists surveyed by Reuters predicted two more reductions taking place throughout the period. Canada recently became the first G7 nation to reduce interest rates within the ongoing cycle, with Sweden and Switzerland’s central banks already announcing their respective rate cuts earlier this year.

ECB President Christine Lagarde mentioned that the decision to lower interest rates by 25 basis points received approval from all 20 national representatives, except for one, though the specific individual was not disclosed.