European central banks are pivoting towards interest rate reductions in the second half of this year as inflation trends toward target levels, with expectations for similar movements in 2024.
The primary focus for central banks across Europe is to lower interest rates, making borrowing cheaper and enhancing access to credit.
Despite their main mandate of maintaining price stability, central banks have not rushed to make decisions on interest rates. Following rapid increases in 2022 and 2023 to combat inflation, the first steps towards easing policy were taken only after tangible results emerged.
Faced with persistently high inflation, European central banks are waiting for inflation to show a tendency to return to target levels before initiating rate cuts. However, differing national situations have led to varied speeds in the easing of monetary policies across European countries.
In response to unprecedented rate hikes in 2022 and 2023, the European Central Bank (ECB) began its first rate cut in June 2024, reducing its three key policy rates by 25 basis points. This marked the first cut in five years.
Following this pivotal decision, the ECB continued to implement further cuts throughout the year, culminating in a total of four reductions. The deposit rate now stands at 3%, the refinancing rate at 3.15%, and the marginal lending rate at 3.40%.
Annual inflation in the Eurozone was recorded at 2.2% in November, aligning with the ECB's target. Analysts predict the ECB may lower rates to 1.5% by the end of 2025, with expectations for a total of 100 basis points in cuts over the year.
Meanwhile, the Bank of England (BoE) maintained its policy 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 to 4.75% by November.
The Swiss National Bank (SNB) has led the way in easing policy among developed nations, reducing its rate to 0.5% after a series of cuts throughout the year.
Norway's central bank, Norges Bank, has kept its policy rate at 4.5% since December 2023, signaling the potential for its first cut in March 2025.
In Sweden, the Riksbank has also been active, reducing its policy rate by 150 basis points throughout the year, with the latest cut bringing it to 2.5%.