Rikki Jørgensen
1 week ago

ECB expected to lower interest rates to boost eurozone economy

The European Central Bank (ECB) is poised to reduce interest rates ahead of the U.S. Federal Reserve, making the eurozone the first major economy to ease borrowing costs as inflation stabilizes following Russia’s invasion of Ukraine.

ECB President Christine Lagarde, alongside other officials, has indicated a likely quarter-point rate cut from the current high of 4%. This move marks a shift from the early days of the inflation surge, when the U.S. Federal Reserve led the way in tightening credit.

The ECB began increasing rates about four months after the Fed's initial hikes.

As reported by Yahoo Finance, central banks globally are leaning towards lowering rates. Several smaller economies, including Sweden, Switzerland, Hungary, and the Czech Republic, have already enacted rate cuts. The Bank of England is also considering a rate cut from its current 5.25% during their meeting on June 20.

The eurozone experienced a significant inflation surge due to Russia cutting off most natural gas supplies, coupled with supply chain disruptions as the global economy recovered from the COVID-19 pandemic. Although the eurozone was initially hit hard by the energy price spike, inflation has fallen to 2.6% in May, down from a peak of 10.6% in October 2022, aligning closely with the ECB’s target of 2%.

The Federal Reserve, facing a different economic scenario, expects to cut rates this year from the current benchmark of 5.25%-5.5%. However, no changes are anticipated at the Fed's upcoming policy meeting on June 11-12.

U.S. inflation, currently at an annual rate of 3.4%, remains higher than the eurozone's, but is still some distance from the Fed's 2% goal.

A reduction in the ECB’s rates could, theoretically, weaken the euro against the dollar by driving investment towards higher-yielding dollar assets. However, the euro has recently strengthened, rising from $1.06 in mid-April to around $1.09, even with the anticipated rate cut.

A quarter-point cut by the ECB is unlikely to lead to a rapid series of further reductions. The bank is expected to proceed cautiously to ensure inflation remains under control while easing credit to support the economy. Inflation in the services sector, covering areas such as healthcare and hospitality, remains elevated at 4.1%.

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