ECB cuts interest rates for the first time since 2019

Eshe Nelson/The New York Times
when inflation Officials cut three key interest rates for the 20 countries that use the euro by a quarter percentage point to get closer to the central bank’s 2% target. The benchmark deposit rate fell to 3.75% from 4%, the highest level in the bank’s 26-year history, after being fixed since September.

The President of the European Central Bank said on Thursday that “the inflation outlook has improved significantly.” Christine Lagardeat a press conference Frankfurt, Germany“The current level of monetary policy tightening is appropriate.”

But he did not specify how many times the bank might cut rates again or how often.

There is growing evidence around the world that policymakers believe high interest rates are effective in slowing economic growth and curbing inflation. Now they are lowering them, which could provide relief to businesses and households by making borrowing less expensive.

Wednesday, Bank of Canada It became the first central bank in the Group of Seven to cut interest rates. Swiss yes Sweden They also recently cut interest rates.

People are less willing to make policy more flexible USAFed officials want to have more confidence that the recent persistent inflation data will end. Bank of England The door has been opened to a rate cut, with some officials suggesting it could happen as soon as this summer.

The European Central Bank cut interest rates on Thursday, its first cut since September 2019, sending a strong signal that the worst of the inflation crisis has arrived. Europa Firmly in the rearview mirror.

By the end of 2022, average inflation across the eurozone is expected to be above 10% as higher energy prices spread to consumer goods and services and workers demand higher wages to mitigate the impact of higher prices.

The ECB has embarked on its most aggressive cycle of rate hikes in recent years. In September, the authorities raised the deposit rate (the interest rate banks pay for overnight deposits with the central bank) to 4% from minus 0.5% in July 2022.

This helps Reduce inflation Eurozone growth rose to 2.6% in May. Lower energy prices have helped to keep inflation down for much of the past year. Food inflation has slowed to below 3% from more than 12% a year ago.

“this Monetary Politics “Financing conditions have remained tight. This has made a significant contribution to lower inflation by dampening demand and anchoring inflation expectations,” Lagarde said.

Europe’s benchmark stock index rose to a record high on Thursday before the rate cut was announced, but gave up some of those gains on signs the bank will be cautious about future rate cuts.

The central bank warned that there were still signs of elevated price pressures, meaning inflation would remain above its 2% target “well into next year.” Headline inflation is expected to average 2.2% next year, higher than the bank forecast three months ago.

Recent inflation data has been stronger than expected. ServeGrowth was particularly sustained, accelerating to 4.1% in May from 3.7% in the previous month. Wage growthwhich could push up consumer prices if businesses pass on higher wage costs rather than absorbing them.

“Wage growth is high,” Lagarde said, although wage growth is expected to slow over the full year.

He added that he would not yet describe the central bank as being in a “retreat phase.” Instead, policymakers need to use new economic data “to keep reaffirming that we are on a deflationary path” every time they meet to decide interest rates.

Investors are looking toward the U.S., where inflation is proving more severe than initially expected, and wondering whether what is happening in Europe should serve as a warning of what might happen next.

There are also doubts about the extent of the ECB’s rate cuts, as Federal Reserve Wait. Rising U.S. interest rates will continue to tighten financial conditions there and elsewhere because of the dollar’s ​​global role, weakening the euro and posing inflation risks.

After more than a year Economic Stagnationthe region’s economy shows some Signs of recoveryThe European Central Bank’s cautious approach is further justified. On Thursday, bank staff forecast that the euro zone economy will grow 0.9% this year, up from a forecast of 0.6% three months ago.

Lagarde said the services sector is expanding, manufacturing is stabilizing at moderate levels and exports are expected to grow as global demand increases. At the same time, the combination of lower inflation and higher wages will improve economic conditions. Purchasing Power He added that as interest rates fall, the drag of monetary policy on the economy will also decrease.

Nevertheless, Lagarde stressed the uncertainty of the inflation outlook, noting that price growth will fluctuate around current levels for the rest of the year and “will encounter bumps along the way.” As a result, interest rate decisions will be made at each meeting based on incoming data.

“We are not pre-committing to a particular rate path,” he said.