The European Central Bank (ECB) on Thursday confirmed an expected interest rate cut despite persistent inflationary pressures in the 20-nation euro zone. The decision will take the central bank's policy rate to 3.75% from 4%, where it has remained since September 2023.
“Taking into account our latest assessment of the inflation outlook, underlying inflation developments and the robustness of monetary policy transmission, after nine months of interest rate stability, it is appropriate to ease the tightening of monetary policy,” the ECB Governing Council said.
Latest inflation forecast
The ECB's revised macroeconomic forecasts revised up its forecast for average annual headline inflation in 2024 to 2.5% from 2.3% previously.
Similarly, the 2025 forecast has been adjusted to 2.2% from the previous 2%, while the 2026 forecast is remaining steady at 1.9%.
The 25 basis point cut was fully expected by financial markets at the June meeting, and would be the first rate cut since September 2019, when deposit facilities were in negative territory.
Market forecasts are not currently expecting another rate cut this year, but a recent Reuters poll of economists suggested two more cuts were possible over the same period.
Dean Turner, chief euro zone economist at UBS Global Wealth Management, told CNBC that further rate cuts are unlikely at the ECB's next meeting in July, especially given the latest data.
Given recent inflation trends, a slight upward revision to inflation forecasts was expected, but I believe the next rate cut will come in September.
The relative positions of the European Central Bank and the Federal Reserve
The ECB started raising rates later, but its June cut put it ahead of the U.S. Federal Reserve, which is still struggling with U.S. inflation.
European Central Bank President Christine Lagarde said the decision to cut interest rates by 25 basis points was supported by all but one of the 20 country representatives, but did not name those who dissented.
“We all agree that our approach will depend on the data and will be decided as the meeting progresses, there is no disagreement on that point,” Lagarde added.
The Board noted that its analysis would continue to be guided by three criteria: inflation outlook, core inflation, and monetary policy transmission.
On Lagarde's decisions and predictions
Speaking to reporters in Frankfurt, European Central Bank President Christine Lagarde said the decision to cut rates was influenced by a strong fall in headline inflation and growing confidence in the ECB's forecasting capabilities.
Lagarde noted that the ECB went through a tough “first phase” of rate hikes, with 450 basis points of hikes between July 2022 and September 2023, followed by a period of stable rates to date.
Lagarde noted that with each step, inflation effectively halved, from a peak of 10.6% in October 2022 to 5.2% in September 2023 and 2.6% in May 2024. “With each repricing, our measures halved the inflation rate,” she told CNBC's Annette Weisbach.
He also highlighted the “credibility and robustness” of ECB staff projections, noting that inflation forecasts for the fourth quarter of 2025 have remained little changed since September. “The decision to cut interest rates is based on the strength and robustness of these projections,” he said.
Italian economy minister expects further ECB rate cuts
Italy's economy minister expressed optimism that the ECB's latest rate cut will be the first of many. “The time has come, and we hope that this is just the first step in that direction,” Economy Minister Giancarlo Giorgetti said, according to Reuters.
Markets had largely expected a cut in June, but the question remains as to how many more cuts there will be before the end of the year. Markets are pricing in at least one more cut, with some economists expecting two more.
