ECB Cuts Interest Rates by 0.25% Point, Pivoting Ahead of the US

Base Interest Rate at 4.25%, Deposit Interest Rate at 3.75% ↓
Second Highest Among G7... Attention on Movements of Major Countries Including the US

The European Central Bank (ECB) cut its key deposit rate by 0.25 percentage points for the first time in five years. Following the Bank of Canada, it became the second among the Group of Seven (G7) countries to lower interest rates, making a 'pivot' ahead of the United States. The market is closely watching whether this ECB rate cut will lead to rate reductions by major countries, including the U.S.

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On the 6th (local time), the ECB announced that it would lower the key interest rate to 4.25%, the deposit rate to 3.75%, and the marginal lending rate to 4.5%, each by 0.25 percentage points. This marks the first time in eight years that the ECB has cut its key interest rate and the first time in five years that it has lowered the deposit rate.

In a statement, the ECB explained, "Price pressures have eased, and inflation expectations have declined across all dimensions," adding, "High borrowing costs have significantly contributed to the slowdown in inflation, making it appropriate now to ease the degree of monetary policy restraint." However, regarding the future path of interest rates, the ECB emphasized, "We will take a data-dependent and meeting-by-meeting approach," and "We do not commit to a specific interest rate path in advance."

The inflation forecast was revised upward. The ECB raised its inflation forecast for this year from the previous 2.3% to 2.5%, and for 2025 from 2.0% to 2.2%, each by 0.2 percentage points. The inflation forecast for 2026 was maintained at 1.9%, the previous level.

The ECB maintained a 'zero (0) interest rate' for over six years due to the European debt crisis, but with pandemic-driven quantitative easing and the Ukraine war causing rapid price increases, it raised rates ten consecutive times from July 2022 to September last year. Before the cut, the key interest rate of 4.5% was the highest since the Eurozone's inception in 1999. With Eurozone inflation significantly easing from a peak of 10.6% in October 2022 to an annualized 2.6% in May, conditions have been set for a dovish turn in monetary policy.

However, there is analysis suggesting uncertainty about further ECB rate cuts due to the possibility of inflation rebounding. The May inflation rate rose compared to the previous month (2.4%), and the service sector inflation rate remains high at 4.1%.

The market is focusing on the timing of rate cuts by other G7 advanced economies as the ECB pivots to rate cuts ahead of the U.S. The Bank of Canada lowered its key interest rate by 0.25 percentage points to 4.75% the day before, marking the first rate cut among G7 members since the pandemic. The Bank of England (BOE) is also scheduled to decide on its key interest rate at its meeting on the 20th. However, the likelihood of lowering the current 5.25% rate is low.

The U.S. Federal Open Market Committee (FOMC) is also expected to maintain the current key interest rate range of 5.25?5.5% at its meeting on the 12th. The market expects the Fed to cut rates by 0.25 percentage points as early as September and to lower rates one or two more times within the year.