The ECB cuts rates – could the BoE follow suit?

The ECB cuts rates – could the BoE follow suit?

The European Central Bank has cut its key deposit rate by 0.25% to 3.75%.

This is the first rate cut it’s made in five years, and it signals that national interest rates now might start to come down in the UK and US markets.

The inflation rate across the eurozone fell to 2.6% in the year to May, down from 10% at the end of 2022.

Ben Nichols, interim managing director of investment firm RAW Capital Partners, said: “The ECB’s decision will resonate with consumers and investors not just in the EU, but globally.

“While the impact of the cut is unlikely to be felt immediately, the move adds to the growing feeling that the global economy has turned a corner, and should provide some impetus to the Eurozone’s business investment, consumer spending and housing markets.

“We could also see investor sentiment experience something of an uptick in the aftermath of this decision, which could instigate a pick-up in global trade and investment.

“However, the risk remains that the ECB is cutting rates too early, and it will be intriguing to see if the US Federal Reserve and Bank of England follow suit in the coming months.

“The outlook for energy prices is unreliable and geopolitical conflict in Europe and the Middle East could create major challenges further down the line.

“What’s more, the Eurozone’s labour market remains surprisingly strong. Therefore, a rekindling of inflationary pressures remains a significant risk factor if the bank cuts rates too quickly.”

The financial markets expect two to three rate cuts by the end of the year, though the ECB is likely to take a cautious approach next month.

Susannah Streeter, head of money and markets, Hargreaves Lansdown, said: ‘’The European Central Bank has, as widely predicted, cut the eurozone’s key interest rate to 3.75%, moving faster than the Bank of England and the Federal Reserve.

“The reduction will come as a relief for many consumers and companies, whose finances have been stretched to breaking point by the rapid ratcheting up of interest rates.

“But ECB policymakers are expected to hit the pause button now, as sticky inflation has returned as a worry. While rates went straight up like a rocket, they look likely to descend in bumpy fashion.”

The rate cut follows similar reductions in Canada, Sweden and Switzerland.