Eurozone interest rates cut by ECB, first since pandemic
The European Central Bank announced a long-awaited decision on Thursday. Interest rates in the eurozone, as predicted by most experts, have been reduced by 25 basis points. According to some analysts, this may signal the start of a cycle of cuts.
The European Central Bank has reduced interest rates. The deposit rate has dropped by 25 basis points to 3.75%. This is the first rate cut since the Covid-19 pandemic in 2020.
The European Central Bank has reduced interest rates
According to the ECB's statement, inflationary outlooks have significantly improved. The ECB also notes that core inflation has decreased, confirming inflation expectations have dropped.
Simultaneously, despite progress in recent quarters, the ECB emphasises that price pressures remain substantial, as wage growth is high and inflation is likely to stay above the target well into next year. The latest projections for overall and core inflation for 2024 and 2025 have been revised upwards compared to the March projections.
Inflation and economic growth outlook
The ECB currently forecasts that the average overall inflation will be 2.5% in 2024, 2.2% in 2025, and 1.9% in 2026. For inflation, excluding energy and food, the staff projects an average of 2.8% in 2024, 2.2% in 2025, and 2.0% in 2026. Economic growth is expected to accelerate to 0.9% in 2024, 1.4% in 2025, and 1.6% in 2026.
The Governing Council assures it is determined to bring inflation back to the medium-term target of 2% in due time. It will keep interest rates at a sufficiently restrictive level for as long as necessary to achieve this goal.
Analysts predict the start of a cycle
As indicated by Allianz Trade analysts, the ECB's decision means that it is joining other European central banks in Switzerland, Sweden, the Czech Republic, and Hungary, which have already begun their easing cycles in recent months. This indicates that a transatlantic policy divergence is possible.
In Allianz Trade's opinion, despite easing interest rates, ECB's quantitative tightening will intensify, increasing from an average of 25.2 billion pounds monthly over the past year to around 31.3 billion pounds monthly. This acceleration follows the announcement last December that the ECB would reduce reinvestments under the PEPP programme worth 1.4 trillion pounds starting from July, and the ongoing passive unwinding of the APP programme, which has already shrunk from a maximum of 2.9 trillion pounds in 2022 to the current 2.5 trillion pounds - reads the commentary.
Analysts have also presented their predictions. "we maintain our long-held view of only two cuts in 2024 and a terminal rate of 2.5% to be reached in the course of 2025," they write.
Geopolitical uncertainty will force the ECB to delay further cuts
"Considering the recent inflationary surprises, the ECB will likely pause in July and make another rate cut in September. By then, headline inflation is likely to reach the 2% target, thanks to favourable base effects," they forecast.
In their opinion, geopolitical uncertainty related to the U.S. elections, higher inflation rates due to adverse base effects, and the risk of growing transatlantic policy divergence will force the ECB to shift the remainder of the monetary policy easing cycle to the first quarter of 2025.
"Further easing in 2025, with four additional cuts, will lead to a terminal interest rate of 2.5%, which assumes a real neutral interest rate of around 0.5%," the analysts emphasize.
