European Central Bank lower interest rates for the first time since September 2019

The European Central Bank (ECB) lowered the most crucial interest rate in the eurozone for the first time since September 2019. The central bank's policymakers in Frankfurt decided on Thursday to bring the interest rate down by a quarter of a percentage point to 3.75 percent. That decision was in line with economists' predictions. The ECB hopes lower loan costs will stimulate the economic recovery in the euro area.

About future rate cuts and policy changes, ECB President Christine Lagarde said that no decision will be made "until much later in the summer if we will do something now or at another point in time." During a press conference on Thursday, she said the rate cut announced earlier in the day was "justified by confidence in the path ahead."

A lower interest rate from the ECB will make it cheaper for banks to lend money, and they will lower the interest on the money that they loan to consumers, companies, and governments. Mortgage rates could also drop. People with variable mortgage interest rates and those who take out a mortgage will be the first to notice this.

Financing costs for company investments will also drop. However, interest paid on savings will also become less attractive.

The "robustness" of inflation projections for the fourth quarter of 2025 formed the basis of the rate cut decision, Lagarde said. The ECB expects the continuation of the economic recovery, where real income continues to rise with price pressures currently diminishing.

"It is on the basis of this reliability and solidity, and robustness of those projections that we have made that decision to actually cut,” she said. Further cuts will depend on inflation data, the underlying causes of inflation, and translating that into monetary policy, she explained.

Inflation will likely hover around current levels until the end of this year, Lagarde predicted. "Inflation will then decline towards the target in the second half of 2025," she said.

The central bank started raising interest rates in July 2022 at a record speed to a record level of four percent to combat the high rate of inflation within the eurozone. After the last interest rate hike in September, the ECB kept the interest rate unchanged five meetings in a row while awaiting the impact that the higher loan rates would have on inflation.

Inflation peaked at almost 11 percent in 2022 because of the war in Ukraine and the hike in energy prices. The inflation has dropped since, but inflation in the eurozone went up slightly to 2.6 percent in May, meaning that it is still above the ECB's goal of two percent.

The move has ensured that the ECB is ahead of the U.S. Federal Reserve in loosening the reigns. The persistent inflation in the United States has ensured that the Fed will wait until after the summer before it lower interest rates.

This could lead to a weaker euro compared to the US dollar. Lagarde affirmed after the last interest decision in April that the ECB would be making its own choices, when she said, "We are data dependent, not Fed dependent."