Will the ECB Lower Interest Rates in the Eurozone for the First Time in 5 Years?

The Eurozone countries are eagerly awaiting the European Central Bank’s interest rate decision, which is expected to take place tomorrow (Thursday). It is anticipated that the ECB will announce a lowering of interest rates in the Eurozone for the first time since 2019. Currently, the interest rate on deposits stands at 4% since September last year. The operative interest rate and loans are also expected to decrease, marking the first decrease since 2016. This move would align the Eurozone with other countries like Switzerland, Canada, and Israel that have already implemented monetary easing this year.

The interest rate cuts in the Eurozone are expected to happen before larger economies like the US and UK make similar moves. The Federal Reserve, for instance, is closely monitoring price increases that surprised central bank members earlier this year. They are waiting for more certainty that inflation is moving towards the target before making a decision on interest rates.

The ability to lower interest rates in the Eurozone is tied to the moderation of inflation in recent months. After reaching double-digit peaks in 2022, the inflation rate was only 2.6% in May. The central bank expects inflation to reach the target of 2% by 2025. Despite the impending interest rate cut, the ECB is expected to proceed cautiously. The interest rate is projected to be 3.75% by the end of the year, with monetary easing continuing into 2025 but at a slower pace.

There is concern about a potential rise in inflation in the Eurozone, especially in service components, with a 4% increase in the latest price index. The ECB’s cautious approach is also influenced by the exchange rate between the euro and the dollar. A devaluation of the euro could lead to increased inflation due to higher import prices and wage pressures in Eurozone countries.

The decision of the European Central Bank to potentially lower interest rates ahead of the Fed reflects differences in inflation dynamics between the Eurozone and the US. While there may be some divergence in policy between the two central banks, it is unlikely that the ECB will make multiple interest rate cuts without considering the actions of the Fed. The differences in inflation trends between the two economies will likely shape future monetary policy decisions.