WORLD
EU leads big economies in rate cut as ECB slashes policy rate to 3.75%
- IBJ Bureau
- Jun 07, 2024
The European Union (EU) has become the second major global economy to cut its lending rate this week, saying that it had made progress in tackling inflation.
The European Central Bank (ECB) announced a cut in its main interest rate from an all-time high of 4 to 3.75 per cent.
That follows Canada’s decision on Wednesday to cut its official lending rate.
The ECB’s move comes as voters head to the polls for EU-wide elections over the next four days, with the outcome expected to reflect people’s unhappiness over cost-of-living pressures.
ECB President Christine Lagarde said that the outlook for inflation had improved “markedly”, paving the way for the rate cut.
However, she warned that inflation was likely to remain above the bank’s 2 per cent target “well into next year”, averaging at 2.5 per cent in 2024 and 2.2 per cent in 2025.
The ECB would keep interest rate policy “sufficiently restrictive for as long as necessary” to bring inflation down to the bank's 2 per cent target, she said.
However, she added: “We are not pre-committing to a particular rate path.”
Lindsay James, an investment strategist of Quilter Investors, said that the rate cut had been widely anticipated but would nevertheless come as a relief to consumers and businesses on the continent.
“The ECB has stolen a march on the Bank of England and (US) Federal Reserve – who are both potentially still a few months away from cutting – and will breathe life into an economy that desperately needs some form of stimulus,” she added.
Central banks have kept rates high for the past two years to bear down on the rate at which prices are rising, with most targeting an annual inflation rate of 2 per cent. But higher interest rates tend to dampen economic growth.
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