ECB Cuts Main Interest Rate for First Time Since 2019, Moving Ahead of Fed and Bank of England

The European Central Bank cut its main interest rate for the first time in almost five years on 6 June 2024, reducing the deposit rate from a record high of 4% to 3.75% and putting the eurozone ahead of both the US Federal Reserve and the Bank of England, which had yet to ease policy, The Guardian reported. The main refinancing operations rate was also cut, from 4.5% to 4.25%.

The decision

In a statement, the ECB said: "Keeping interest rates high for nine months has helped push down inflation. It is now appropriate to moderate the degree of monetary policy restriction." President Christine Lagarde said the central bank was confident its forecasts were robust and that if inflation continued its downward trajectory, rates would continue to fall. "It is on the basis of the reliability, solidity, robustness and strength of our projections that we have made the decision to cut," she said.

Lagarde noted that pay settlements were moderating and companies were absorbing some labour cost increases rather than passing them to consumers. However, she warned: "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."

• Deposit rate cut from 4.00% to 3.75% — first reduction since September 2019
• Main refinancing rate cut from 4.50% to 4.25%
• Inflation forecast: 2.5% in 2024, 2.2% in 2025 (revised up from 2.3% and 2.0%)
• GDP growth forecast: 0.9% in 2024, 1.4% in 2025, 1.6% in 2026
• Markets priced one further cut in 2024 and three in 2025

Analyst reaction

Dean Turner, chief eurozone economist at UBS Global Wealth Management, said the disinflationary process was "firmly under way" and the ECB should feel confident to ease policy at a pace of roughly one cut per quarter. Mark Wall, chief European economist at Deutsche Bank, described the move as a "hawkish cut", noting: "The statement arguably gave less guidance than might have been expected on what comes next. This is not a central bank in a rush to ease policy."

Divergence across the eurozone

Strains within the currency bloc remain visible as economies recover at different speeds from the pandemic and the initial impact of the war in Ukraine. According to European Commission projections cited in the report, Croatia and Romania are expected to grow by more than 3% in 2024, with inflation at 3.5% and 5.9% respectively. By contrast, France and the Netherlands are projected to expand by less than 1%, with inflation of 2.5% in both. Lagarde acknowledged the variations but said the ECB's job is to set rates based on average growth and inflation across the bloc. Better-than-expected performances in Germany, Italy and Spain underpinned the improved growth outlook.