The ECB Took A Step Toward Lower Interest Rates, With Its First Trim Since 2019

What’s going on here?

The European Central Bank (ECB) cut its key interest rate for the first time since 2019.

What does this mean?

The ECB was expected to trim rates from 4% to 3.75%, and it delivered. But investors can’t relax yet: the key for markets is how many cuts there’ll be and when – and that all depends on inflation. Now, energy and food had been driving prices higher, but they’ve been calming down lately. Problem is, wages have picked up recently – and because that means folk have money to spend, those increases are feeding back into inflation. The ECB doesn’t seem overly confident, either, revising its inflation forecasts to land above its 2% target for this year and next. Remember, inflation increasing could lead to rates staying higher for longer. No wonder the central bank wouldn’t commit to any particular path, saying decisions will be made meeting-by-meeting based on the latest data.

Why should I care?

Zooming out: The circle of life.

Interest rate cuts can really bolster an economy: they make borrowing cheaper, encouraging businesses, consumers, and governments to spend more money. It also helps that companies can afford to hire more staff, lining the wallets of workers. All that spending spurs on the economy and companies’ profit – which, in turn, makes stocks more appealing to investors.

The bigger picture: Domino effect.

The lower interest rates are, the less folk earn by sticking cash in a savings account. That pushes them toward riskier assets with the possibility of higher returns, like stocks. And right now, it looks like we’re heading in that direction: Switzerland and Canada have already cut rates, and the UK and US are expected to follow suit later this year. So as central banks keep trimming away, the effect could show up in the stock market.