While stating the 2% target rate of inflation is still in place, the European Central Bank (ECB) has cut benchmark rates by 25 basis points.
The ECB said the European economy is starting to grow, and they anticipate the 2% target will be hit in the second half of 2025. Inflation is currently at around 2.5% in the EU.
Christine Lagarde, President of the ECB, said it was appropriate to lower rates to a moderate degree after 9 months of holding rates steady.
“Underlying inflation has also eased, reinforcing the signs that price pressures have weakened, and inflation expectations have declined at all horizons. 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,” said Lagarde.
The Euro area economy grew by 0.3% over the first quarter of 2024 after five quarters of little growth.
The ECB also said it would reduce the Eurosystem’s holdings of securities under the pandemic emergency purchase program (PEPP) by €7.5 billion per month on average over the second half of the year.
Markets broadly anticipated the intent to cut rates, and there was little change in the Euro’s value to the dollar.
Some described the rate cut as a “hawkish cut” as the ECB has moved to reduce rates in advance of the US Federal Reserve. Currently, expectations in the US are that a rate cut will arrive soonest in September. The Fed continues to state it will always be data-driven, and its 2% inflation target remains firm.