European Central Bank Cuts Interest Rates by 0.25%

On June 6, the European Central Bank (ECB) cut its main interest rates by 0.25%, becoming the first major developed markets (DM) central bank to cut rates. This follows recent decisions by central banks in Canada, Sweden, and Switzerland to reduce their policy rates, and it marks a change in the interest rate cycle that we expect will buttress European economic activity and small-cap equities across developed markets.

The reduction in the ECB’s policy rates was well signalled by governing council members and was enabled by a persistent disinflationary environment over the past year. While preliminary inflation data for May came in hotter than anticipated, headline inflation has nonetheless moderated from a peak of 10.6% in 2022, to 2.6%. However, the recent uptick in sequential monthly inflation prints has served to curtail the total quantity of easing expected from the ECB this cycle. At the beginning of the year, approximately eight cuts were expected, with the trough priced in for late 2025. By contrast, between five and six cuts are now cumulatively priced in through the end of 2026.

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