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ECB Cuts Interest Rates for First Time Since 2019

Rate reduction widens the central bank’s policy gap with the Federal Reserve

Updated ET

President Christine Lagarde speaks at Thursday’s ECB press conference in Frankfurt. Photo: Kirill Kudryavtsev/Agence France-Presse/Getty Images

FRANKFURT—The European Central Bank lowered interest rates by a quarter point, beginning to reverse a historic series of rate increases and widening a policy gap with the Federal Reserve, which isn’t expected to follow suit for months.

The ECB said it would reduce its key interest rate to 3.75% from 4%, its first rate cut in almost five years. Future interest-rate decisions will be based on incoming economic data, the bank said in a statement. The ECB’s rate-setting committee “is not pre-committing to a particular rate path,” the bank said.


The rate cut is a significant moment for investors and the world economy. It marks an inflection point in recent monetary policy and sends a signal that relief is on the way for households, indebted governments and businesses that have reined in investments in the face of high borrowing costs.

The cut also potentially puts the ECB and the Fed on different tracks and widens an existing gap in borrowing costs between the U.S. and Europe. While this could boost Europe’s growth in the short term, the gap could also complicate the work of policymakers, especially in Europe.

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Recent economic data suggest that Europe is facing many of the same sticky inflationary pressures in wages and services as the U.S. Underlying inflation in the eurozone, stripping out volatile food and energy prices, ticked higher to 2.9% last month from 2.7% in April. In the U.S., core inflation declined to 3.6% in April.

At a news conference, ECB President Christine Lagarde said that while inflation had come down, wage growth remains elevated and inflation is likely to stay above its 2% target “well into next year.” The bank’s inflation forecasts for this year and next were revised higher.


Lagarde said little concrete about the likely future path of interest rates, stressing that everything depends on incoming data. “There’s a strong likelihood” that the ECB will continue to cut rates in the months ahead but “what is very uncertain is the speed of travel and the time it will take,” she said.

Investors are closely monitoring any divergences between the world’s major central banks, which often ripple across asset and currency markets. For now, they are betting on only limited divergence: After Thursday’s cut, the ECB, Fed and Bank of England are each expected to cut interest rates by an average of 0.4 percentage point by the end of the year, according to market data from Refinitiv. That suggests one additional quarter-point rate cut and some likelihood of another for each. The Fed is expected to hold interest rates in a range between 5.25% and 5.5% at its policy meeting next week.

Top ECB officials, including Lagarde, had prepared markets for a rate cut this week, making it hard to shift course even as incoming economic data showed growth and inflation tracking higher than expected, analysts said.

“They cornered themselves,” said Dirk Schumacher, a former ECB official now at French bank Natixis.


A scenario where the ECB cuts rates further while the Fed stays put would risk reducing the euro’s strength against the dollar, pushing up the cost of imports and lifting eurozone inflation higher. This could delay further loosening in Europe, whose economy is in bigger need of relief than the robustly growing U.S. economy.

Despite the sharp interest-rate increases of the past two years, economic growth in the U.S. has proven resilient. That isn’t the case in Europe, where the economy has been largely stalled since late 2022, though growth picked up in the three months through March and the continent’s south has done comparatively well due partly to a tourism boom.


Is the ECB taking the right steps with rates? Join the conversation below.

Job creation has been strong on both sides of the Atlantic and wage growth remains high, partly reflecting tight labor markets. Wages are an important input to services-price inflation in the eurozone, which has been running at a roughly 4% annual rate since November.

Just a few months ago, the Fed appeared to be on the same track as the ECB. As of mid-January, market participants were expecting six 0.25-percentage-point cuts from the ECB and between six and seven from the Fed. Some bigshot Fed watchers, including Goldman Sachs chief economist Jan Hatzius, had predicted the Fed would start cutting in March.


A resurgence of U.S. inflation scuttled those hopes. Prices rose at an annual rate of 4.1% in the first four months of 2024, leading some Fed officials to suggest further rate rises might be in the cards.

“We did not expect this to be a smooth road, but these were higher than I think anybody expected,” Fed Chair Jerome Powell said on May 14 of the U.S. inflation readings.

At the same time, indicators of the U.S. labor market and economic activity suggest there is little urgency for the Fed to cut rates as aggressively as forecasters predicted earlier this year.

A broad gauge of underlying demand in the U.S. economy, called “final sales to private domestic purchasers,” rose a healthy 2.8% in the first quarter. The economy has continued adding jobs, and the unemployment rate stood at 3.9% in April, which is low by historical standards. Wage growth has slowed but likely remains too high for inflation to return sustainably to 2%, Fed officials say.


“The underlying economic dynamic is still much more robust in the U.S. than in Europe,” said Gregory Daco, chief economist at EY-Parthenon.

Fed officials have stressed that economic data will guide any changes to monetary policy. To cut rates, Powell said in May, the Fed would have to see lower inflation or an “unexpected weakening” in the job market.

The ECB move leaves the Fed late to the rate-cut party among developed-market central banks. The Swedish, Swiss and Canadian central banks have already trimmed their key policy rates this year. The Bank of Japan never fully took part in the rate-hiking cycle. In the U.K., where inflation is also proving sticky, investors are fully pricing in one quarter-point rate cut by the Bank of England by November, according to data from Refinitiv.

“We need to see more evidence that inflation will stay low before we can cut interest rates,” Bank of England Gov. Andrew Bailey said last month after the bank kept rates on hold.


Some ECB policymakers remain concerned about the difficulty of returning inflation all the way to its target, known as the last mile. Robert Holzmann, governor of Austria’s central bank, dissented on Thursday’s decision, according to a spokesman.

“Data-based decisions should be data-based decisions,” Holzmann said in a statement. The Austria central-bank governor would have preferred to keep rates unchanged, according to a person familiar with the matter.

“By cutting once, the ECB shifts the debate from ‘Should there be a cut?’ to ‘What does the rate path look like?’ ” said Stefan Gerlach, a former Irish central bank official who is now chief economist at EFG Bank in Zurich.

“So I think they have screwed up communications a little bit. They have talked too much. They don’t know the future.”

Write to Tom Fairless at tom.fairless@wsj.com and Paul Kiernan at paul.kiernan@wsj.com


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Appeared in the June 7, 2024, print edition as 'Europe Makes First Rate Cut Since 2019, Diverging From Fed'.