As the U.S. Federal Reserve did a day earlier, the European Central Bank (ECB) added a quarter point to its key interest rate on 27 July, bringing it to 3.75 percent. It began raising the rate in July 2022, when it was -0.50 percent.

The rate has not been so high since 2000, before the euro currency began circulating.

The bank’s governing council also hinted that it might pause its campaign of rate increases next month.

The Fed took June off from increasing its rates; central banks in Australia and Canada also recently paused.

The zone’s top-line inflation rate fell to 5.3 percent in July from 6.1 percent in May. The rate is still almost triple the bank’s 2-percent target rate.

Inflation remains stronger and economic growth weaker in the Eurozone than in the U.S. As a result, the ECB continues a delicate balance: raising interest rates high enough to tame inflation but not to tip the zone into the recession that has been looming for months.

The prospect that the ECB might halt its rate hikes undercut the euro. If the euro’s value continues to slide, that could make imports more expensive and add fuel to inflation.

The currency fell below $1.10 and yields on Eurozone debt also slipped. The euro rose back to $1.10 on 31 July.

The euro’s decline was worsened by news last week that the U.S. economy grew more than expected. The dollar’s value increased against several other currencies, drawing investors back to the buck.

The Eurozone’s economic outlook has darkened, “owing largely to weaker domestic demand,” ECB president Christine Lagarde acknowledged during a press briefing. The region’s GDP has largely stagnated since late last year.

Inflation is unexpectedly stubborn and moves up or down at different rates in different countries. Rising interest rates are more damaging to countries in the southern latitudes, and the bank’s higher interest rates have yet to make their full impact felt across the region’s economy. 

Demand for business loans has slumped to its lowest level ever in late June and early July. That indicates further slowing of economic activity in the months ahead.

Asked about speculation that the bank will not raise rates next month, “our assessment of data will tell us whether and how much ground we have to cover,” Lagarde said. She ruled out any rate cuts in the near future.

If the council pauses increases in September, that will not necessarily mean rate increases are over, she added.

Markets are pricing in a peak ECB rate of 4 percent this year, with rate cuts coming in 2024, data service Refinitiv reported.

The ECB has said interest rates will persist at higher levels for an indefinite period.

TREND FORECAST: The war in Ukraine will continue to chip away at Europe’s economy, denying it foods, raw materials for manufacturing, and finished parts for factories… while pushing inflation higher. Indeed, oil prices spiked 13 percent in July and should the Ukraine War continue to rage, it will roil Europe’s energy supplies and markets.

Europe’s economic security will remain in doubt until the Ukraine War ends. See our ECONOMIC UPDATE in this issue for more trends analysis and trend forecasts.

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