On Thursday, the European Central Bank (ECB) confirmed an anticipated interest rate cut, despite persistent inflationary pressures in the 20-member eurozone. The decision brings the central bank's key rate down to 3.75% from 4%, a level held since September 2023.
‘Taking into account an updated assessment of the inflation outlook, the underlying inflation dynamics and the robustness of monetary policy transmission, it is now appropriate to moderate the degree of monetary policy tightening after nine months of stable rates,’ said the ECB Governing Council.
Updated Inflation Projections
The ECB's revised macroeconomic projections have revised upwards their forecast for annual average headline inflation for 2024 to 2.5%, from a previous estimate of 2.3%.
Similarly, the forecast for 2025 has been adjusted to 2.2%, from 2% previously, while the projection for 2026 has remained stable at 1.9%.
The 25 basis point cut had been fully anticipated by the financial markets at the June meeting. This is the first-rate cut since September 2019, when the deposit facility was in negative territory.
Market forecasts currently predict only one further cut this year. However, a recent Reuters poll of economists suggests the possibility of two more cuts over the same period.
Dean Turner, chief eurozone economist at UBS Global Wealth Management, told CNBC that a further cut at the ECB's next meeting in July was unlikely, particularly in light of the latest figures.
The slight upward revision to inflation forecasts was expected, given recent inflation trends, but I would still think about September for the next cut.
European Central Bank's Position Relative to the Federal Reserve
Although the ECB started raising rates later, the June cut puts it ahead of the US Federal Reserve, which is still struggling with inflation rates in the US.
ECB President Christine Lagarde said the decision to cut interest rates by 25 basis points had been supported by all but one of the 20 national representatives, although she declined to name the dissenter.
‘We all agreed that our approach would depend on the data and that we would decide as the meetings progressed, with no dissent on this point,’ added Ms Lagarde.
The Governing Council confirmed that its analysis would continue to be guided by three criteria: the inflation outlook, core inflation and the transmission of monetary policy.
Lagarde on Decision-making and Predictions
Speaking to reporters in Frankfurt, ECB President Christine Lagarde explained that the decision to cut rates was influenced by the significant fall in headline inflation and improved confidence in the ECB's forecasting abilities.
Ms Lagarde pointed out that the ECB had gone through a ‘first phase’ of rigorous rate hikes, increasing rates by 450 basis points between July 2022 and September 2023, followed by a period of stable rates until today.
Lagarde noted that each phase effectively halved inflation, from a peak of 10.6% in October 2022 to 5.2% in September 2023 and 2.6% in May 2024. ‘At each repricing, our actions have cut inflation in half,’ she told CNBC's Annette Weisbach.
She also emphasised the ‘reliability and robustness’ of ECB staff projections, noting minimal change in the bank's 2025 Q4 inflation forecast since September. ‘Our decision to cut rates is based on the strength and robustness of these projections,’ she said.
Italy's Economy Minister Hopes for Further ECB Interest Rate Cuts
The Italian economy minister expressed optimism that the ECB's recent rate cut would be the first of many. "It's about time. We hope this is just the first step in that direction", said Giancarlo Giorgetti, according to Reuters.
While the market had largely expected the June rate cut, questions remain about how many more cuts could follow before the end of the year. Markets have factored in at least one additional cut, with some economists even predicting two more.