ECB cuts interest rates by quarter percentage point
European Central Bank (ECB)
cut its key deposit rate by a quarter of a percentage point to 2 per cent on Thursday, leaving it at half the level of a year ago when its governing council started to reduce the cost of borrowing.
The bank also reduced its main lending rate, to which tracker mortgages are linked, by a quarter of a point to 2.15 per cent, as inflation continued to ease.
'The immediate beneficiaries of an ECB cut are the over 120,000 mortgage holders with tracker rates,' said Martina Hennessy, managing director of mortgage brokers, Doddl.ie. 'The average tracker mortgage holder with a margin of 1.1 per cent to ECB, will now see savings of €52 per month for every €100,000 owed over a 20-year term.'
Economists widely expect the ECB to reduce its deposit rate again in September, to 1.75 per cent, at the lower end of what the bank sees as a neutral rate that neither stimulates or restricts the economy.
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By that stage the outcome of trade negotiations between the EU and US should be known, allowing a team of central bank staff, led by chief economist Philip Lane, to assess the impact of any future tariffs on inflation.
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Tariff uncertainty makes ECB decision on interest rates easy
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ECB staff lowered their average euro-zone inflation forecasts for this year and next by 0.3 percentage points, to 2 per cent and 1.6 per cent, respectively. They see economic growth, measured as real gross domestic product (GDP) expanding by 0.9 per cent in 2025 and 1.1 per cent in 2026.
Staff also said that in a scenario where trade tensions escalated in the coming months, it would result in inflation and economic growth would likely come in 'below the baseline projections'.
'By contrast, if trade tensions were resolved with a benign outcome, growth and, to a lesser extent, inflation would be higher than in the baseline projections,' the ECB said.
While some economists are of the view that the ECB could cut again later on the year, to leave the main rate at 1.5 per cent, members of the governing council have clearly signalled in recent times that they're almost done with lowering borrowing costs.
Consumer prices rose 1.9 per cent from a year ago in May, down from 2.2 per cent in April, data published on Tuesday showed. Financial markets had expected a figure of about 2 per cent, which is the ECB's official inflation target.
The rate had peaked at 10.6 per cent in late 2022, as Russia's invasion of Ukraine and the subsequent energy crisis compounded the inflationary effect of global supply chain bottlenecks stemming from the Covid-19 pandemic.
'Most measures of underlying inflation suggest that inflation will settle at around the governing council's 2 per cent medium-term target on a sustained basis,' the ECB said.
The governing council 'will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance', it said, adding that it is not pre-committing to a particular rate path.
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