European Central Bank Cuts Key Interest Rates, First Since 2019

The European Central Bank (ECB) cut the key interest rates for the first time in five years on Thursday. It reduced three key policy rates by 25 basis points (100 basis points is equal to 1 percentage point).

The Governing Council of the central bank in its monetary policy statement noted it was now "appropriate to moderate the degree" of monetary policy restriction after nine months of holding rates steady.

Since its meeting in September 2023, inflation has fallen by more than 2.5 percentage points and the inflation outlook has improved markedly.

"Monetary policy has kept financing conditions restrictive. By dampening demand and keeping inflation expectations well anchored, this has made a major contribution to bringing inflation back down," the ECB monetary policy statement said.

The latest Eurosystem staff projections for both headline and core inflation have been revised up for 2024 and 2025 compared with the March projections.

They now see headline inflation averaging 2.5 per cent in 2024, 2.2 per cent in 2025 and 1.9 per cent in 2026.

The ECB Governing Council is determined to ensure that inflation returns to its 2 per cent medium-term target in a timely manner.

"It will keep policy rates sufficiently restrictive for as long as necessary to achieve this aim. The Governing Council will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction," it added.

In particular, its interest rate decisions will be based on its assessment of the inflation outlook in light of the incoming economic and financial data, among others.

Many central banks have raised consistently the policy rates during the COVID-19 pandemic, to manage inflation.

Raising interest rates is a monetary policy instrument that typically helps suppress demand in the economy, thereby helping the inflation rate decline. (ANI)