The European Central Bank’s (ECB) Governing Council has cut the three key ECB interest rates by 0.25 percentage points, with effect from 12 June.

The ECB is the first of the three major western banks to reduce rates following a period of increases and holds, with the Bank of England (BoE) and the US Federal Reserve (Fed) yet to make such a move.

Following the meeting of the Governing Council, the interest rate on the main refinancing operations, and the interest rates on the marginal lending facility and the deposit facility, will be reduced to 4.25 per cent, 4.5 per cent and 3.75 per cent respectively.

The move was widely expected after nine months of steady rates, with the ECB noting that inflation had fallen by more than 2.5 percentage points since September 2023 and the inflation outlook had “improved markedly”.

Mercer CIO for EMEA and Asia, Garvan McCarthy, said that the rate cuts should be supportive for equities and private equity dealmakers who will be looking across the region for opportunities, “which has suffered a slowdown in recent years as a result of rising debt costs and investors’ concerns about the economic outlook”.

“The ECB is moving ahead of the Fed and the BoE, which will make an announcement later this month,” McCarthy added.

“Its increasingly dovish language is reflective of the differing economic realities in Europe and other parts of the world.”

Meanwhile, Insight Investment senior investment specialist, Jan Felix Gloeckner, argued that, as the rate move was already priced into markets, it was unlikely to have much impact on bond markets.

“We continue to have a preference for playing duration from the long side and favour curve steepening trades as major central banks are getting closer to easing policy,” he said.

Quilter Investors investment strategist, Lindsay James, commented: “The starting gun has been fired and the European Central Bank is the first out of the major three banks to start cutting rates. This is a significant move given it is the first rate cut from the ECB in five years, and ends what has been one of the most aggressive and swift rate hiking cycles in modern times.

“Importantly, this is not likely to be a single cut and done for a while, with signals suggesting a further cut or two are on the horizon this year as inflation has subsided. The ECB has stolen a march on the Bank of England and Federal Reserve – who are both potentially still a few months away from cutting – and will breathe life into an economy that desperately needs some form of stimulus.

“While inflation has ticked up in recent months, the economic recovery is beginning to play out. This puts the ECB in a good position to cut further into a slowly improving picture, although the messaging is likely to remain restrained and cautious. As such, there may be some pauses on the way back down for rates in order to limit the scope of any divergence with the Federal Reserve.

“This move also focuses eyes on the BoE, who will make its decision in a couple of weeks. The major central banks will not want to diverge too far from one another, and with political risk being ratcheted up, they also won’t want to be seen as too influential.”

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