European Central Bank Cuts Interest Rates for First Time Since 2019

The European Central Bank lowered interest rates on Thursday for the first time in nearly five years, signaling the end of its aggressive policy to stamp out a surge in inflation.

As inflation returned within sight of the bank’s 2 percent target, officials cut their three key interest rates, which apply across all 20 countries that use the euro. The benchmark deposit rate was lowered to 3.75 percent from 4 percent, the highest in the bank’s 26-year history and where the rate had been set since September.

“The inflation outlook has improved markedly,” policymakers said in a statement on Thursday. “It is now appropriate to moderate the degree of monetary policy restriction.”

There is growing evidence around the world that policymakers believe high interest rates have been effective at restraining economies to slow inflation. Now, they are lowering rates, which could provide some relief to businesses and households by making it cheaper to obtain loans.

“Monetary policy has kept financing conditions restrictive,” policymakers said. “By dampening demand and keeping inflation expectations well anchored, this has made a major contribution to bringing inflation back down.”

On Wednesday, the Bank of Canada became the first Group of 7 central bank to cut rates. Central banks in Switzerland and Sweden also cut rates recently.

There is more caution in the United States, where officials at the Federal Reserve are waiting to be more confident that a recent run of stubborn inflation readings will end. The Bank of England has opened the door for rate cuts, with some officials saying rates could be lowered this summer.

The E.C.B.’s rate cut on Thursday, the first since September 2019, sends a strong signal that the worst of Europe’s inflation crisis is firmly in the rearview mirror. In late 2022, average inflation across the eurozone peaked above 10 percent as a surge in energy prices fed through to consumer goods and services, and workers demanded higher wages to blunt the pain of the jump in prices.

In recent years, the E.C.B. embarked on its most aggressive cycle of rate increases. Policymakers lifted the deposit rate, which is what banks receive for depositing money with the central bank overnight, to 4 percent last September, from negative-0.5 percent in July 2022.

Inflation in the eurozone slowed to 2.6 percent in May. For most of the past year, lower energy prices have helped pull down inflation. Food inflation has slowed to below 3 percent, from more than 12 percent a year ago.

On Thursday, Europe’s benchmark stock index climbed to a record high before the rate cut was announced, but erased some of its gains amid signs that the bank would be cautious about future rate cuts.

The central bank warned that there were still signs of strong price pressures, which would mean inflation would stay above the 2 percent target “well into next year.” The overall inflation rate is forecast to average 2.2 percent next year, above the bank’s projection three months ago.

Officials are facing a challenging balancing act. On the one hand, policymakers want to cut interest rates in a timely manner so that high rates do not cause excessive damage to the economy that could see inflation fall below their target. On the other hand, they do not want to ease policy too soon, which could cause inflationary pressures to revive.

On Thursday, the E.C.B.’s staff forecast that the eurozone economy would grow 0.9 percent this year, lifting the forecast from 0.6 percent three months ago.

Christine Lagarde, the president of E.C.B., will give a news conference later in Frankfurt, and investors and analysts will be listening closely for clues about the future pace of rate cuts.

“The governing council is not precommitting to a particular rate path,” the bank said in the statement.