Market Report

ECB cuts interest rate ahead of BoE and Fed

euros
The ECB has cut the cost of borrowing in the eurozone

Markets were buoyant after the European Central Bank cut its key interest rate from 4% to 3.75%, despite slightly increasing its inflation outlook for the year.

The FTSE 100 finished 38.39 points, or 0.47%, higher to end the day at 8,285.34.

The ECB’s rate cut, the first since September 2019, comes after eurozone inflation fell to 2.6% from a peak of 10.6% in October 2022 — although prices have ticked up from 2.4% in April.    

ECB president Christine Lagarde said: “Underlying inflation has eased, reinforcing the signs that price pressures have weakened, and inflation expectations have declined at all horizons.”

However, she warned that a weaker world economy, an escalation in trade tensions between major economies, Russia’s war against Ukraine and conflict in the Middle East are all threats to eurozone growth.  

Chris Beauchamp, chief market analyst at IG, said: “The ECB joined the Bank of Canada in cutting rates this week, but it was in no hurry to hint at further cuts.”

The Bank of Canada’s first rate cut in four years yesterday meant it joined Switzerland and Sweden in starting to loosen monetary policy.

However, financial markets are not expecting interest rates to fall as rapidly as predicted earlier in the year. The general election effectively ruled out a cut at the Bank of England’s next meeting on 20 June, just two weeks before voters go to the polling stations.

The most likely to begin easing the cycle in August or September and the US Federal Reserve may hold off lowering its borrowing costs until December.

An economist at the British Retail Consortium, Harvir Dhillon, told Daily Business last week that inflation could rise to 3% by the autumn, putting pressure on the Bank of England to delay further rate cuts.



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