The European Central Bank (ECB) announced on Thursday an interest rate cut of a quarter point.
The rate was reduced to 3.75%. This is the first reduction in five years.
The Eurozone has been grappling with inflation in the wake of the COVID-19 pandemic and the Russian invasion of Ukraine.
The charges had been pending since October.
The ECB decided on several interest rate hikes starting in mid-2022.
What did the ECB say about the cut?
Inflation is forecast to reach 2.5% in 2024. The ECB had previously forecast an inflation rate of 2.3%.
It is expected to fall to 2.2% in 2025 and 1.9% in 2026, according to forecasts published on Thursday.
The eurozone economy is expected to expand by 1.4% in 2025, a point lower than forecast in March. In 2026, it may reach 1.6%.
The ECB said that “price pressures have eased and inflationary expectations have decreased across all horizons.”
“The outlook for inflation has improved significantly,” he said.
However, he said high prices continued to put pressure on consumers despite rising wages.
“Despite progress over recent quarters, domestic price pressures remain strong as wage growth has picked up and inflation is likely to remain above target next year.”
No quick cuts are expected
The bank said that decisions will continue to be made based on the inflation outlook.
“[The ECB] will keep policy rates fairly restrictive for as long as necessary,” he said.
“The Governing Council will continue to follow a data-driven and meeting-by-meeting approach to determine the appropriate level and duration of restriction.”
ECB chief Christine Lagarde told a news conference that the pace of future cuts is “highly uncertain”.
“What is very uncertain is the speed at which we travel and the time it will take,” she said, adding that there could be “bumps in the road.”
Analysts say Thursday’s cut is unlikely to be followed by a series of rapid cuts.
“The immediate tone is a ‘hawkish cut’. This is not a central bank in a rush to ease policy,” Deutsche Bank economist Mark Wall was quoted as saying by the Reuters news agency.
“Climbing inflation will limit the scope for further rate cuts, and the ECB’s statement also gives no hint of the ECB’s path forward,” ING economist Carsten Brzeski pointed out in comments to Agence France-Presse (AFP).
The US Federal Reserve has signaled a delay in cutting rates due to stubborn inflation. The ECB may seek to slow its cuts to avoid weakening the euro.
sdi/nm (AFP, AP, Reuters)
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