The EU became the second major economy in the world to cut lending rates this week.
The European Central Bank (ECB) announced it would cut its key interest rate from a record 4% to 3.75%.
This follows Canada's decision on Wednesday to cut its official lending rate.
The ECB's move comes as voters head to the polls over the next four days in EU-wide elections whose results are expected to reflect public frustration over cost-of-living pressures.
Lindsay James, investment strategist at Quilter Investors, said the move was widely expected but would still come as a relief to consumers and businesses on the continent.
“The ECB is ahead of the Bank of England [US] “While the Fed may still be months away from cutting interest rates, some stimulus would provide a boost to an economy that desperately needs it,” she said.
Central banks have kept interest rates high for the past two years to keep inflation in check — most target an annual inflation rate of 2% — but high interest rates tend to slow economic growth.
Lower interest rates should lower borrowing costs for consumers and businesses, stimulating economic activity.
The EU's interest rate body met in Frankfurt on Thursday and decided to cut interest rates despite a slight increase in inflation in May, which rose in the 27-nation bloc to 2.6 percent from 2.4 percent in April.
The ECB's decision came after Canada cut interest rates on Wednesday, lowering its key policy rate to 4.75% from 5% after inflation fell to 2.7%. Sweden and Switzerland also cut rates.
Catherine Nice, chief European economist at investment firm PGIM, said she was “fairly confident” the ECB would cut rates further over the summer or fall, bringing euro zone interest rates to below 3.5% by the end of the year.
“Economic growth has recovered strongly from the recession that the eurozone experienced towards the end of last year but remains weak,” he told the BBC's Today programme.
This factor, combined with slowing inflation and wage growth, would justify further rate cuts, she said.
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