The European Central Bank (ECB) has cut interest rates by a quarter of a percentage point for the eighth time in a year, as the bank attempts to support the euro economy after the turmoil caused by US president Donald Trump’s trade war.
The benchmark rate on the deposit facility has been reduced from 2.25% down to 2%, from a high of 4% toward the middle of 2023.
Main refinancing operations, charged when banks can borrow funds from the ECB on a weekly basis, has been cut to 2.15%, from 2.4%, and the marginal lending facility, charged when banks seek overnight credit from the ECB, has been cut to 2.4%, from 2.65%.
The ECB’s governing council said: “In particular, the decision to lower the deposit facility rate – the rate through which the governing council steers the monetary policy stance – is based on its updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission.”
The move, which was widely expected, follows a drop in eurozone inflation to 1.9% last month, which slipped below the ECB’s 2% target for the first time since last September.
Core inflation, which strips out volatile food and energy prices, also showed signs of easing — slowing to 2.4% in May, from 2.7% in April, below expectations of 2.5%. On a monthly basis, core prices rose by just 0.1%.
Investors are already pricing in a pause in July, and some conservative policymakers have also advocated for a break to give the bank a chance to reassess uncertainty and the future outlook.
ECB policymaker Robert Holzmann said that “the ECB should pause further interest rate cuts until at least September,” while board member Isabel Schnabel warned of “new shocks posing new challenges” even as disinflation remains on track.
Anatoli Annenkov, Societe Generale economist, said: “Reasons for the ECB to be cautious moving forward relate both to the need for more information on the trade war, and retaliatory measures in particular, and on German fiscal easing.”