Europe cuts interest rates, following Canada

While the Federal Reserve is not yet poised to start cutting interest rates in the U.S., other major world economies are seeing enough progress in the fight against inflation to start lowering borrowing costs.

The European Central Bank (ECB) announced Thursday that it would lower each of its three key interest rates by a quarter of a percentage point, dropping its main deposit facility rate to 3.75 percent effective next week.

That rate has been held at a record-high 4 percent since September of last year as part of a program of quantitative tightening undertaken by most advanced economies in the aftermath of the pandemic response.

“Inflation has fallen by more than 2.5 percentage points [since September] and the inflation outlook has improved markedly. Underlying inflation has also eased, reinforcing the signs that price pressures have weakened, and inflation expectations have declined at all horizons,” the ECB’s governing council said in a Thursday statement.

The move follows an interest rate cut to 4.75 percent from 5 percent by the Bank of Canada on Wednesday, which became the first Group of Seven nation to trim its main policy rate.

“If the economy continues to evolve broadly as we had expected, if we continue to see inflation pressures easing, it is reasonable to expect that there will be further cuts in interest rates,” Bank of Canada Governor Tiff Macklem said Wednesday.

Inflation in the eurozone is projected to be 2.6 percent in May, down from 5.4 percent in 2023. In updated economic projections, the ECB revised its inflation expectation for this year up to 2.5 percent from 2.3 percent. It expects inflation to fall to 2.2 percent in 2025 and to 1.9 percent in 2026.

Inflation in the U.S. is proving stickier than expected, having hovered above 3 percent in the consumer price index for nearly a year. The personal consumption expenditures price index, a measure of inflation preferred by the Fed, dropped to 2.7 percent in April.

The Federal Reserve is not expected to cut rates at either of its next two meetings, and there is debate about whether it will plan to cut rates at all this year.

Market commentators noted Thursday that there is pressure on central banks to stay generally in sync with each other.

“We expect the ECB to cut only one more time this year given the increasing possibility of no Fed rate cut this year and the ECB revised its inflation forecast for 2025 to above its target at 2.2 percent,” Morgane Delledonne, head of investment strategy for Europe at Global X.

“We expect the ECB will try to avoid widening spreads between the two regions which could otherwise result in a subsequent selloff of the euro against the US dollar,” she said.