The end of an era in the Eurozone
In line with expectations, the European Central Bank (ECB) reduced interest rates by 25 basis points and reduced the deposit interest to 3.75 percent. “We will keep interest rates sufficiently restrictive for as long as necessary,” the decision text said. “The Governing Council does not pre-commit to a specific rate.” The statement was included.
The European Central Bank (ECB) reduced benchmark interest rates for the first time in about 5 years as inflation in the Eurozone became less of a problem than the weak economic growth outlook.
The ECB Governing Council reduced refinancing, deposit and marginal funding rates by 25 points to 4.25, 3.75 and 4.50 percent, respectively. “We will keep rates sufficiently restrictive for as long as necessary. The Governing Council will continue to follow a data-driven and meeting-by-meeting approach to determine the appropriate level and duration of the restriction. The Governing Council does not pre-commit to a specific rate,” the decision reads. The statement was included.
This was recorded as the first reduction since March 2016 for both the refinancing rate and the marginal funding rate. It was the first reduction in deposit interest since September 2019.
While the Fed gives the message that it will keep interest rates high until it gets more evidence that inflation in the USA is moving towards the target, it is predicted that the ECB’s interest rate cut may have a downward effect on the euro. With the ECB reducing interest rates by 25 basis points each, the difference between Eurozone and US interest rates will widen.
Annual inflation in the Eurozone exceeded expectations
ECB officials, led by ECB President Christine Lagarde, have emphasized that they are comfortable diverging from the Fed, even if there is a risk of a weaker currency that could trigger inflation. Data announced on May 31 revealed that consumer prices in the Eurozone exceeded expectations with 2.6 percent on an annual basis in May.
Bloomberg Economics expected a 25 basis point cut from the ECB in June and announced that they predicted further cuts of the same size in September, October and December after the interest rate was kept constant in July.
However, Lagarde stated on March 20 that the ECB will probably have sufficient assurance to decide on the first interest rate cut in June 2024, adding, “We cannot commit in advance the path that interest rates will follow after the first interest rate cut.” he said.
Joachim Nagel, President of the German Central Bank (Bundesbank) and member of the ECB Board of Directors, stated in March that inflation in the Euro Zone could be stubborn and that the ECB could not make a commitment about what would happen after the first possible reduction in interest rates in June.
The decision of the ECB, one of the most important central banks in the world, which is responsible for managing the monetary policy of 20 countries in the Eurozone, to reduce interest rates will make borrowing to buy a house or consumer goods cheaper, which has been keeping monetary policy officials busy for more than two years. It is expected to be a turning point in the fight against inflation.
Lagarde: We will keep interest rates limited enough
ECB President Christine Lagarde made the following statements at the press conference held after the interest rate decision:
“We are seeing some reduction in the underlying pressures of inflation. We see that price stability is weakening and inflation expectations are trending downwards. There is a serious recovery in inflation forecasts. The latest inflation forecasts have been revised upwards for 2024 and 2025. We will keep interest rates sufficiently limited. We will determine the tightening process with the decisions we will make from meeting to meeting. “We expect the economy to continue to improve.”