After sharply raising borrowing costs in recent years to try to quell rising prices, a number of countries around the world are shifting gears. Last week, the European Central Bank (ECB) announced its first interest rate cut in 5 years, lowering its key lending rate from an all-time high of 4% to 3.75%.
It came a day after Canada took a similar step and followed a wave of similar moves in recent months by countries including Sweden, Switzerland, Brazil and Mexico.
Officials in Britain and the US, where borrowing costs are now at their highest in years, are expected to hold off on any downward rate adjustment at a meeting this month. However, many analysts are of the opinion that the correction is inevitable and will happen, if not in the summer, then at the latest in the beginning of autumn.
It is a sign that the global fight against inflation caused by the pandemic is entering a new phase, as hopes are building in some of the biggest and hardest-hit economies that inflation in the prices of goods and services will most finally mastered.
„This is an important move. We are going through another stage,” said Brian Coulton, chief economist at Fitch Ratings.
Just a few years ago, central banks around the world were aggressively raising interest rates, hoping that higher borrowing costs would weigh on the economy and ease the pressure, pushing up prices.
The moves were unusually timed, in response to global supply chain problems and shocks to food and energy markets that sent prices soaring around the world.
This coordination has faded over the past year and become more volatile.
In the Eurozone, the United Kingdom and the United States – economies that haven't had inflation problems for decades, officials have maintained a holding pattern, keeping interest rates high for decades.
The ECB's decision is a statement of confidence that trends are moving in the right direction, said Emma Wall, head of investment research and analysis at Hargreaves Lansdown.
„What the central bank is saying today is that although inflation is not falling in a straight line, it can be brought to the target level of 2%," she says.
Eurozone inflation now stands at 2.6%, while in the UK it has fallen to 2.3%, well below the peak of over 11% at the end of 2022.
In the US, the Federal Reserve's preferred gauge of inflation, the personal consumer spending index, fell to 2.7%.
Still, the Federal Reserve, which has spearheaded the move to higher interest rates, has moved cautiously, reflecting concerns that progress on the issue may have stalled and that stronger-than-expected growth and heavy government spending could make resolving it more difficult.
„The eurozone economy is in a different place than the US,” said Yael Selfin, chief economist at KPMG.
So far, many analysts are predicting at least one, if not more, interest rate cuts in the US, the eurozone and the UK this year and as early as 2025. Such moves would bring relief to businesses and households looking to borrow. But analysts say the downward path for rates is likely to be slower than expected.
If central bankers cut interest rates too quickly, they risk unleashing a wave of economic activity that sends prices back up.
In announcing the interest rate cut last week, the ECB was trying to stay away from promising future action, noted Mark Wall, chief economist at Deutsche Bank. “The statement probably gave less guidance than might have been expected about what comes next,” he said.
"In the eurozone, the forces that kept interest rates low before the pandemic, including slower growth and an aging population, are likely to re-emerge, eventually pushing them back closer to zero," said Joseph Gagnon, Sr. fellow at the Peterson Institute for International Economics.
But he said the U.S. was unlikely to see a return to the ultra-low borrowing costs that prevailed in the decade after the financial crisis, pointing in part to large budget deficits that are likely to keep pressure on interest rates.