The European Central Bank (ECB) has made its first interest rate cut since 2019, signaling progress in combating high inflation. This move, which saw a 0.25% reduction, has ignited optimism in the global financial markets and raised questions about whether the U.S. Federal Reserve will follow suit.
While the ECB's decision reflects strides in addressing inflationary pressures, officials caution that challenges persist due to ongoing service price inflation. Despite this, the rate cut has prompted discussions about the possibility of a similar action by the Federal Reserve in upcoming meetings.
The ECB's announcement comes amid efforts to temper soaring inflation, which peaked at 10.6% in October but has since moderated to 2.6%. The central bank's decision to raise interest rates between July 2022 and September 2023 has contributed to this decline. Key refinancing operations, lending facilities, and deposit facilities now stand at 4.25%, 4.50%, and 3.75%, respectively.
While inflation remains above the ECB's 2% target range, projections suggest a gradual decrease to 2.2% by next year and 1.9% by 2026. Similarly, core inflation, excluding food and energy prices, is expected to decline to 2.2% in 2025 and 2% the following year. These developments underscore the ECB's cautious approach to policy rates amid evolving economic conditions.
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