Economy: The ECB cuts interest rates for the first time since 2019

PublishedJune 6, 2024, 5:35 p.m.

The European Central Bank lowered its key rates on Friday, offering a breath of fresh air to households and businesses, but also warned that the future would be uncertain due to the volatility of inflation.

Serving as a benchmark in the euro zone, the rate on deposits of 4% – its highest level reached last September – was reduced to 3.75%, the monetary institute indicated after a meeting of its decision-making body. The ECB’s last rate cut dates back almost five years, in September 2019, in a very different context of negative rates and very low inflation.

The euro zone has since experienced a peak in inflation in the fall of 2022, in the wake of the Russian war in Ukraine and shortages of goods post-Covid-19 crisis, forcing the ECB to launch an unprecedented rate hike. in July 2022. After a pause on rates for nine months during which inflation slowed by more than 2.5 percentage points, to show 2.6% in May, the governing council deemed it “timely” to make a gesture of appeasement on the rent of money, according to its press release.

A decision taken “unanimously minus one vote”, its president Christine Lagarde told the press. However, the speed and duration of future rate cuts are still “very uncertain”, added the central banker.

The institute remains determined to see inflation return to its 2% medium-term target as soon as possible, but there are “obstacles on the road which may surprise” and “which we are not completely sure of [l’]scale,” she explained.

Also, the ECB is not “committing in advance to a particular rate trajectory”, she warned, dampening hopes of a guaranteed series of rate cuts in the months to come. If a movement to reduce the cost of money was initiated “with a high probability” on Thursday, the continuation “will depend on the data” available meeting by meeting, insisted Ms. Lagarde.

“We still have a way to go” before arriving at a so-called “neutral” rate, one which neither penalizes nor supports activity, she said. “We do not expect an aggressive cut in interest rates in the coming months, as inflation has not yet been overcome,” commented DZ Bank.

The ECB still sees inflation “remaining above the target” of 2% and “for a large part of next year”, according to the press release explaining its decisions. The cause is internal price pressures which remain strong, especially in services, due to high wage growth.

The institute therefore revised its inflation forecasts upwards compared to that of March, seeing the aggregate on average at 2.5% in 2024 and 2.2% in 2025, finally 1.9% in 2026. The most visible impact of this first drop in rates should concern the real estate market, where borrowers, especially those with variable rates, had been caught by the throat by the sudden rise in rates. News that will relieve many households in Luxembourg.

This could “alleviate the slump in the real estate market, the recovery of which can support growth somewhat,” notes Eric Dor, director of economic studies at the IESEG School of Management. Businesses could also benefit by obtaining credit on more favorable terms for their investments. On the other hand, savers will see their returns decline.

When it comes to lowering rates, the Frankfurt institute on Thursday burned politeness for the first time in its history at the American Federal Reserve (Fed). The latter, which meets in a week, will have to wait to relax its policy due to inflationary tensions linked to the dynamism of the American economy.

The ECB, by lowering its rates, could also cause the euro to fall, favoring exports. But this would also make imports more expensive, leading to further fuel inflation.