The European Central Bank cut its key interest rate to 3.75 percent from 4 percent on Thursday, the first time it has cut rates since 2019. The bank’s move marked a divergence from the U.S. Federal Reserve, which is maintaining high interest rates in the face of stubborn inflation.
Like central banks around the world, the E.C.B. had raised interest rates over the past two years to fight a surge in inflation, which began as the global economy rebounded from the Covid-19 pandemic.
The E.C.B. started raising interest rates in July 2022, a few months after the Fed, ending its era of negative rates. The increase, half a percentage point, was the first of 10 straight for the European bank, taking rates to the highest level in the bank’s history. It has held rates steady since September, and inflation in the eurozone is now lower than in the United States.
Inflation has been a persistent problem for European governments and policymakers over the past few years as the region’s economy reeled from a surge in energy prices after Russia’s invasion of Ukraine in February 2022. Supply chain disruptions also hit European economies hard. Inflation in the eurozone climbed above 10 percent in October 2022.
By this May, though, inflation had fallen to 2.6 percent in the eurozone. That’s still above the E.C.B.’s target of 2 percent, but it is expected to get close to the goal late next year.
Even as the E.C.B. cuts rates, the Fed has signaled that it will not be doing so anytime soon. While the economy of the eurozone has stagnated in the E.C.B.’s bid to tame inflation, the U.S. economy has not been slowed as much by the higher rates. Prices have also continued to rise faster than the Fed’s 2 percent target.
“There has already been divergence in the economies,” said Mariano Cena, an economist at Barclays. “So if there is divergence in policy, it’s because it follows the different trajectories of the economies.”
