ECB cuts rates for first time in five years

The European Central Bank cut interest rates by 25 basis points on Thursday, as widely expected.

The deposit rate was reduced to 3.75% in what marked the first cut from the ECB in five years.

It said: "The Governing Council today decided to lower the three key ECB interest rates by 25 basis points.

"Based on an updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission, it is now appropriate to moderate the degree of monetary policy restriction after nine months of holding rates steady."

The Bank said it now expects headline inflation this year to be 2.5%, up from a previous estimate of 2.3%. In 2025, it sees inflation at 2.2%, up from an earlier forecast of 2%.

Carsten Brzeski, global head of macro at ING, said: "Today’s decision is unique in many ways. Not only is it one of the very few times that the ECB makes a turn on monetary policy before the Fed, it is also the first time the ECB starts cutting rates after a tightening cycle without facing a recession or crisis.

"In fact, if it hadn’t been for the very vocal communication since February, latest macro data could have easily justified another pause at today’s meeting. The recent increase in wage growth and inflation as well as the economy gaining some positive momentum would have been strong arguments against the rate cut. In fact, it seems as if the ECB cut rates not so much because it had to, but simply because it simply could."

He added: "We think that sticky inflation will limit the room for additonal rate cuts and the ECB's statement also doesn't give away any hints at the future path of the ECB. But let’s here from ECB president Christine Lagarde at the press conference, starting at 2.45pm CET, how open the door for future rate cuts already is or whether the ECB will refrain from giving any forward guidance."

On Wednesday, the Bank of Canada became the first of the G7 central banks to cut rates in the current cycle.

Interest rates were reduced by 25 basis points to 4.75%, in what marked the first cut in four years.