Euro Area: ECB cuts rates for the first time since 2019 in June
At its meeting on 6 June, the Governing Council of the European Central Bank (ECB) decided to lower the three key interest rates—the main refinancing operations, marginal lending facility and deposit facility rates—by 25 basis points each, to 4.25%, 4.50% and 3.75%, respectively. The move was in line with market expectations and followed a 450 basis point hiking cycle spanning from July 2022 until September 2023.
The Central Bank’s decision to adjust interest rates was primarily influenced by a significant reduction in inflation, which has fallen by more than 2.5 percentage points since the September 2023 meeting, and an improvement in the inflation outlook. Despite these positive developments, domestic price pressures remain due to elevated wage growth, and inflation is expected to stay above the 2.0% target well into next year. Accordingly, the Bank revised their inflation forecasts slightly upwards and now sees inflation averaging 2.5% in 2022, 2.2% in 2025 and 1.9% in 2026.
The Governing Council did not provide explicit forward guidance on the future path of interest rates, stating instead that it will maintain a data-dependent and meeting-by-meeting approach. It emphasized its commitment to keeping policy rates sufficiently restrictive to ensure inflation returns to its 2.0% medium-term target, without pre-committing to a specific rate path. That said, the Consensus is for the ECB to reduce rates further in Q3.
Carsten Brzeski, global head of macro at ING, commented:
“All in all, today’s rate cut clearly fulfils all of the requirements for a ‘hawkish cut’. The stickiness of inflation has clearly made some ECB members more cautious and reluctant than a few months ago […]. One rate cut in September and another one in December are the most likely outcomes. However, it wouldn’t take a lot of negative inflation surprises for the ECB to tread more carefully or even reverse today’s cut.”
Similarly, analysts at Goldman Sachs said:
“While a cut in July is highly unlikely, we expect the data over the summer to be enough for a second move at the September meeting, supported also by our expectation for a September Fed cut. That said, a September cut is not a done deal and a pause is possible with upside surprises to the inflation and wage data over the summer. We therefore maintain our baseline for two additional cuts this year (September, December).”