The EU has become the second major global economy to cut its lending rate this week, saying it had made
progress in tackling inflation.
The European Central Bank (ECB) announced a cut in its main interest rate from an all-time high of 4% to 3.75%.
That follows Canada’s decision on Wednesday to cut its official lending rate.
The ECB’s move comes as voters head to the polls for EU-wide elections over the next four days, with the outcome expected to reflect people’s unhappiness over
cost-of-living pressures.
Christine Lagarde, president of the ECB said the outlook for inflation had improved “markedly”, paving the way for the rate cut.
However, she warned that inflation was likely to remain above the bank’s 2% target “well into next year”, averaging 2.5% in 2024 and 2.2% in 2025.
The ECB would keep interest rate policy “sufficiently restrictive for as long as necessary” to bring inflation down to the Bank’s 2% target,she said.
“The ECB has stolen a march on the Bank of England and [US] Federal Reserve – who are both potentially still a few months away from cutting – and will breathe life into an economy that desperately needs some form of stimulus,” she said.
Central banks have kept rates high for the past two years to bear down on the rate at which prices are rising, with most targeting an annual inflation rate of 2%. But higher interest rates tend to dampen economic growth.
A cut in interest rates should boost economic activity by making it cheaper for consumers and businesses to borrow.
Meeting in Frankfurt on Thursday, the EU’s rate-setting body decided to cut rates, despite a slight uptick in inflation in May. Inflation rose to 2.6%, from 2.4% in April in the 27-nation bloc.
The ECB’s decision followed Canada’s rate cut on Wednesday which brought its headline rate down from 5% to 4.75%, after inflation there fell to 2.7%. Sweden and Switzerland have also trimmed rates.
Source: BBC
