Image source, Getty Images
- author, Natalie Sherman
- role, BBC News
Countries around the world that have sharply raised borrowing costs in recent years to curb rising prices are now trying to reverse course.
The European Central Bank (ECB) announced its first interest rate cut in five years on Thursday, lowering its key lending rate to 3.75% from a record 4%.
This comes a day after Canada took similar measures, joining a string of other countries including Sweden, Switzerland, Brazil and Mexico in recent months.
Interest rates in the UK and US are at their highest in years, but officials in both countries are expected to postpone rate cuts when they meet this month.
But many analysts expect action in late summer or early fall, arguing it’s only a matter of time.
It’s a sign of a new phase in the global fight against pandemic-induced inflation, raising hopes that price increases can finally be brought under control in some of the largest and hardest-hit economies.
“This is a significant move,” said Brian Coulton, chief economist at Fitch Ratings. “We’re moving into a new phase.”
Just a few years ago, central banks around the world were aggressively raising interest rates as rising borrowing costs weighed on economies, hoping to ease upward pressures on prices.
The moves are unusually synchronized and come in response to problems in global supply chains and shocks to food and energy markets that have sent prices soaring around the world.
Over the past year, that cooperation has weakened and become more unstable.
In the eurozone, Britain and the United States, which have not experienced inflation problems for decades, authorities have maintained policy and kept interest rates at their highest levels in decades.
Emma Wall, head of investment research and analysis at Hargreaves Lansdown, said the ECB’s decision was a statement of confidence that trends were heading in the right direction.
“What the central bank is saying today is that while inflation may not come down in a straight line, we are confident that we can get inflation down to our 2% target level,” she said.
Eurozone inflation is currently at 2.6%, while in the UK inflation has fallen to 2.3%, well down from a peak of more than 11% in the second half of 2022.
In the United States, the Federal Reserve’s preferred inflation gauge, personal consumption expenditures, fell to 2.7%.
Still, the Fed, which has been at the forefront of raising interest rates, is treading cautiously, reflecting concerns that progress on the problem may be stalling and that better-than-expected economic growth and big government spending could complicate a solution.
“The euro zone economy is in a different situation than the U.S. economy,” said Yael Serfin, chief economist at KPMG.
For now, most forecasters expect at least one rate cut this year in the US, eurozone and UK, with further cuts in 2025.
These measures will provide relief to businesses and households looking to borrow.
But analysts say the decline in interest rates will likely be slower than the rise and will likely stagnate.
If central banks cut interest rates too quickly, they risk setting off a wave of economic activity that could send prices soaring again.
Moving too slowly risks triggering a deeper recession under the weight of rising borrowing costs.
Mark Wall, chief economist at Deutsche Bank, noted that the ECB was careful to avoid promising future action when announcing the rate cut on Thursday.
“The statement was arguably less guidance than was expected about what was going to happen next,” he said. “This isn’t a sign that the central bank is in a rush to ease policy.”
Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics, said the factors that had kept interest rates low before the pandemic, such as slowing growth and an aging population, are likely to re-emerge in the euro zone and ultimately push rates closer to zero.
But he said the U.S. is unlikely to return to the ultra-low borrowing costs that prevailed in the decade after the financial crisis, and noted that large budget deficits are likely to keep putting upward pressure on interest rates.
“The cuts will come a little slower than in Europe, but I think we’ll see rates rise once this is over,” he said.
