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European Central Bank Cuts Interest Rates

The ECB moves ahead of the Fed but pours cold water on hopes for more near-term rate cuts.

Photo collage illustration of bar graphs with floating euro coins

The European Central Bank lowered interest rates for the first time since 2019, but with its cautionary outlook on inflation, it signaled that additional rate cuts will come slowly.

The ECB’s 0.25-percentage-point cut in its main interest rate had been widely expected. At the same time, the bank’s announcement clarified that “domestic price pressures remain strong as wage growth is elevated, and inflation is likely to stay above target well into next year.”

During a post-decision press conference, ECB president Christine Lagarde refused to commit to a succession of rate reductions. She instead echoed previous statements that the bank’s governing council will follow a data-dependent, meeting-by-meeting approach. ”I think the direction of travel is concrete now, but the pace of cuts might be slower than initially expected,” says Morningstar strategist Michael Field.

The ECB’s decision comes as expectations faded that the US Federal Reserve would actively cut rates in 2024, thanks to stickier-than-expected inflation in the country. The central bank is instead expected to hold the federal-funds rate at its current range of 5.25%-5.50% until September, when a quarter-point cut is seen as likely, according to the CME FedWatch Tool.

European Central Bank vs. US Federal Reserve Rates

ECB Rate Cut Highlights

  • Main refinancing rate: 4.25%, down from 4.50%
  • Marginal lending facility rate: 4.50%, down from 4.75%
  • Deposit facility rate: 3.75%, down from 4.00%

“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,” the ECB’s statement read.

This is the ECB’s first interest rate cut in five years, and it follows 10 increases since the Frankfurt-based central bank began its rate-hiking cycle in July 2022.

According to the statement, effective June 12, the interest rates on main refinancing operations, marginal lending facilities, and deposit facilities will each be lowered by 0.25 percentage points.

ECB Revises Up Inflation Forecast

The latest Eurosystem staff projections for both headline and core inflation for 2024 and 2025 have been revised up from the March projections. They now see headline inflation averaging 2.5% in 2024, 2.2% in 2025, and 1.9% in 2026. For inflation excluding energy and food, they project an average of 2.8% in 2024, 2.2% in 2025, and 2.0% in 2026. Economic growth is expected to pick up to 0.9% in 2024, 1.4% in 2025, and 1.6% in 2026.

ECB Precedes Fed Decision

For the first time, the ECB acted ahead of its US counterpart to change rates. The cut followed similar moves by other major Western central banks. In March, the Swiss National Bank was the first major bank to announce a rate cut, followed by Sweden’s Riksbank in May. Yesterday the Bank of Canada announced it will cut its overnight rate to 4.75% after six consecutive pauses. The Fed will announce its next monetary policy decision on June 12, while the Bank of England will do so on June 20.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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