European Central Bank Interest Rates to Start Decreasing This Year – What Will Happen?

Global financial authorities are discussing reducing borrowing rates for the first time since the spiking inflation and interest rates during COVID-19. The decision is intended to spur economic recovery after suffering from regional and global geopolitical tension and instability.

European Central Bank interest rates are expected to start the reduction cycle sooner than other global market players. Many investors are closely monitoring this decision to speculate on the outcomes and make their forecasts on the next cuts’ percentages and dates.

These reductions are aligned with the improving global inflation trends, but how will lowered rates affect inflation? Let’s discuss.

What Does Cutting Rates Mean for The Economy?

The ECB is set to cut interest rates on June 6th. This decision will affect three categories: main refinance, deposit rates, and marginal lending. Financial regulators usually introduce a tentative reduction to test the waters before continuing or pausing the cycle.

European regulators are ready to introduce a 25-point reduction (0.25%) in all classes, including the base refinancing rate to 4.25%, the deposit rate to 3.75%, and the marginal lending rate to 4.50%. 

Inflation and interest rates have always been interconnected, and when the European Central Bank starts cutting rates, this is most likely due to improving inflation figures.

These reductions are expected to lower households’ borrowing costs, which will improve their purchasing power and motivate them to spend more money financed by loans. 

Eurozone Inflation Figures

After spiking Euro area inflation rates at 6-9% in the first half of 2023, a massive improvement was witnessed as these numbers dropped to 3.1% by the end of 2023 in the EU countries.

These figures continued dropping in 2024, marking an economic recovery and slow price growth, which opposed what was happening in 2023. These facts were sufficient for the European Bank to introduce interest rate cuts in 2024.

However, it is crucial not to significantly decrease borrowing costs because the economy might have reverse outcomes and cause unwanted results.

Interest Rates Cuts 2024

Financial regulators around the world have started taking steps towards reducing their bank lending rates. The US Fed’s reductions have been long overdue, and the recommendations are for the UK authorities to start following the European model.

Fed Interest Rate Cuts

The US Federal Reserve started a series of rate increases in March 2022, which lasted until the last incremental in August 2023. The current lending rate lies in the 5.25%-5.50% range.

However, after announcing two-step interest reductions this year in September, the Federal Reserve is still cautious about commencing these cuts because of inflation numbers.

However, optimistic analysts forecast that US regulators will seek reductions as soon as possible to stimulate economic growth in 2024.

UK Interest Rate Cuts

After spiking at 11% in October 2022, inflation in the UK has been on a free fall, dropping to 2.3% on April numbers. This motivated the International Monetary Fund to recommend that UK regulators follow the global trends and consider interest cuts.

The current Bank of England borrowing rates reside at 5.25%. However, the IMF suggests that the rate must be dropped to 3.5% by the end of 2025, which means seven-fold reductions in one and a half years.

Although inflation is still far from the Bank of England’s target of 2%, a drop in interest rates can solidify an economic recovery.

Conclusion

In a milestone decision, the European Central Bank’s interest rates are set to start dropping very soon, in June 2024. This step aligns with improving inflation numbers in the Eurozone and around the world.

The US Fed interest rates have been spiking at 5.5% for many months, and starting a reduction cycle makes sense now. In addition, the UK economy has recovered massively, justifying an interest reduction to stabilize local consumer markets.