European Central Bank widely expected to cut interest rates this week

The European Central Bank (ECB) is poised to consider a rate cut this week, providing a boost to the bloc’s economy, which has stagnated over the last two years as high borrowing rates stifle investment.

Eurozone GDP grew by 0.3 per cent in the first quarter of 2024, marking a swift exit from recession even as overall production remained weak.

The expected cut of 25 basis points (0.25 per cent) will be the first cut in the main refinancing operations rate and the marginal lending rate since March 2016, and the first reduction in the deposit rate since September 2019.

The Governing Council of the ECB was widely expected to announce a cut earlier this year, in March, but an uptick in the inflation rate put that plan on hold.

The latest inflation figures have once again revealed a minor increase in inflation, but barring any major surprises, the rate cut is expected to go ahead.

The ECB will likely proceed with caution after that, with analysts expecting one to two more cuts in 2024.

The decision would make the ECB among the first central banks to start scaling back the monetary policy measures introduced to bring inflation under control. The Swiss National Bank cut its rates in March, followed by the Swedish, Czech and Hungarian central banks, while the Bank of Canada is expected to cut rates this week along with the ECB – but the Bank of England and the Federal Reserve are not expected to do the same just yet.

The ECB will be wary of any great divergence from the Fed’s rates, since doing so would weaken the euro and increase the cost of imported goods – including oil.