Now at 4.25 percent

ECB cuts key interest rate by 0.25 percentage points

For the first time since the great wave of inflation, the European Central Bank (ECB) reduced its key interest rate on Thursday. As expected by experts, it was lowered by 0.25 points to 4.25 percent. The move is considered historic as it is the first interest rate cut since March 2016, meaning that the ECB is faster than the US Federal Reserve with its interest rate turnaround. It remains to be seen how the ECB will proceed.

At the same time, the key deposit rate on the financial market was lowered from 4.0% to 3.75%. However, most experts do not expect a rapid series of further easing measures, but rather a cautious course. One or two additional reductions are expected on the bond markets by the end of the year.

In recent weeks, a number of monetary policymakers have already expressed the view that the interest rate meeting in June could be the appropriate starting point for the interest rate turnaround. This is because wage growth, which has recently been one of the strongest drivers of inflation in the eurozone, has recently weakened somewhat.

Since September 2023, the ECB has kept the deposit rate, which banks receive when they park surplus funds with the central bank, at a record level of 4.0%. The key interest rate at which banks can obtain fresh money from the ECB was 4.5 percent.

Important signal for the economy
The ECB's aim is for the inflation rate in the eurozone to stabilize at two percent in the medium term. The most recent inflation rate in the eurozone was 2.6 percent.

ECB raises inflation expectations
However, the ECB has had to raise its inflation expectations for this year and 2025 slightly. It is now forecasting 2.5 percent inflation in the current year instead of 2.3 percent. In 2025, inflation is expected to remain above the target value at 2.2 percent, whereas the ECB had previously assumed two percent. For 2026, 1.9 percent is still expected.