The European Central Bank cut interest rates for the first time in nearly five years on Thursday, marking the end of its aggressive policy to curb soaring inflation.
With inflation back within the central bank’s 2% target, officials cut three key interest rates that apply to all 20 countries that use the euro. The benchmark deposit rate was cut to 3.75% from 4%, the highest level in the 26-year history set by the bank since September.
“The outlook for inflation has improved significantly,” policymakers said in a statement on Thursday. “It is now appropriate to relax the degree of restrictions on monetary policy.”
There is growing evidence from around the world that policymakers believe that high interest rates can effectively suppress the economy and slow inflation. Now, lower interest rates will provide some relief, making it cheaper for businesses and households to get loans.
“Monetary policy has been constraining financing conditions,” the policymaker said. “This has contributed significantly to the fall in inflation by dampening demand and stabilizing inflation expectations.”
On Thursday, Europe’s benchmark stock index climbed to a record high ahead of the rate cut announcement.
On Wednesday, the Bank of Canada became the first G7 central bank to cut interest rates. The Swiss and Swedish central banks have also recently cut interest rates.
The U.S. is more cautious, with Fed officials waiting for greater confidence that a recent run of stubborn inflation data will end. The Bank of England has left the door open to cutting interest rates, with some officials saying lower rates could come this summer.
