In a historical move indicative of its mounting concern over persistent inflation, the European Central Bank (ECB) pushed up Eurozone interest rates to an unprecedented high. This recent increase – the tenth of its kind in an unprecedented succession – takes the key rate to 4%, a climb from the former 3.75%.
The bank’s decision comes amidst warnings that inflation could persist at uncomfortably high levels for an extensively drawn-out period. This decision was informed by predictive models forecasting an inflation rate of around 5.6% for the year 2023. However, in light of the recently heightened interests rates, the ECB has indicated that further hikes may be on hold for the interim.
The governing council of the ECB stated, “The key ECB interest rates have reached levels that, if sustained over a significant duration, will greatly aid in ensuring that inflation returns to target levels on time”. Added to this, the bank anticipates that inflation across the 20-nation bloc should decrease to an estimated 2.9% next year, gradually falling to 2.2% by the year 2025.
Eurozone, like other parts of the globe, is grappling with escalating food and energy prices, which have tightened the reins on household budgets. To help reign in these soaring prices, central banks worldwide have turned to a strategy of incrementing interest rates.
This strategy of banking on higher interest rates to curb inflation hinges on the idea that by increasing the expense of borrowing money, people will have less surplus cash, eventually reducing spending and easing price hikes. However, this comes with a perilous balancing act. If interest rates are lifted excessively, it may inadvertently trigger a recession.
Currently, the interest rates in the UK surpass the Eurozone at 5.25%. Concurrently, the UK faces higher inflation at a staggering 6.8%, which is leading many to forecast another imminent rate hike by the Bank of England.
The ECB has expressed its firm commitment to swiftly return inflation to its target level of 2%. However, it also acknowledges the adverse impact of high-interest rates on the bloc’s economic growth forecasts, which have to be revised downwards substantially.
Expert economists at Pantheon Macroeconomics interpret ECB’s latest pronouncement as a ‘clear indication’ of a halt to further rate hikes. They perceive slim chances for any change in monetary policy at the upcoming October and December meetings and anticipate a narrow window for rate cuts in the coming year.
While ECB President Christine Lagarde did not dismiss potential future rate hikes, she emphasized that the attention in the foreseeable future would pivot towards the duration. In June, revised statistics revealed that the Eurozone had slipped into a recession during the previous winter, a slump that was personified by Germany – Europe’s leading economy.
Generally, a state of recession is declared when an economy contracts for two subsequent quarters. This domino effect can be worrisome for businesses, potentially leading to job losses.
