European central banks are moving to cut interest rates in the second half of this year as inflation seeks to target levels, with expectations of similar moves in 2024.
The focus of Europe’s central banks is on lowering interest rates, making borrowing cheaper and improving access to credit.
Despite the fact that their primary mandate is to maintain price stability, central banks have been slow to make interest rate decisions. After raising rates sharply in 2022 and 2023 to fight inflation, the first steps towards policy easing were taken only after tangible results emerged.
Faced with persistently high inflation, European central banks expect inflation to show a tendency to return to target levels before initiating rate cuts. However, differences in national situations have led to different speeds of monetary policy easing in European countries.
In response to unprecedented rate hikes in 2022 and 2023, the European Central Bank (ECB) initiated its first rate cut in June 2024, lowering its three key interest rates by 25 basis points. This marked the first cut in five years.
Following this key decision, the ECB continued to make further cuts throughout the year, resulting in a total of four cuts. The deposit interest rate now stands at 3 per cent, the refinancing rate at 3.15 per cent and the margin lending rate at 3.40 per cent.
Annual inflation in the euro zone was recorded at 2.2 per cent in November, in line with the ECB’s target. Analysts forecast that the ECB could cut rates to 1.5% by the end of 2025, with expectations of a 100 basis point cut within a year.
Meanwhile, the Bank of England (BoE) held its interest rate at 5.25% until August 2024, when it implemented a 25 basis point cut. The BoE has since made two cuts this year, bringing the rate down to 4.75% in November.
The Swiss National Bank (SNB) led the way in policy easing among developed economies, cutting its rate to 0.5% after a series of cuts over the course of the year.
Norway’s central bank, Norges Bank, kept its interest rate at 4.5% from December 2023, indicating the possibility of a first cut in March 2025.
In Sweden, the Riksbank was also active, cutting its interest rate by 150 basis points during the year, with the latest reduction bringing it down to 2.5 per cent.
