At its meeting on 26 October, the governing council of the European Central Bank (ECB) ended its streak of 10 consecutive interest rate hikes, leaving its deposit rate at 4 percent, its highest since the euro currency was launched on 1 January, 1999.

Inflation across the Eurozone has slowed to 4.3 percent in September from its peak of 10.9 percent in September 2022. 

The region’s economy has dipped into, and climbed back out of, recession for several months. (For example, see “Eurozone in Recession” 13 Jun 2023 and “Eurozone Economy Shrank in Third Quarter, PMI Indicates” in this issue.) Lending, business investment, and overall economic growth have slowed. Analysts expect data due this week to show a contraction in the third quarter, the Financial Times reported.

The area’s economy “is likely to remain weak for the remainder of the year” as the impact of past rate hikes is “broadening” across the economy, ECB president Christine Lagarde told a post-meeting press briefing, but refused to rule out another rate increase if new data warrants.

The ECB also is monitoring weak economies in southern Europe. Italy’s 10-year bond yield has risen to 5 percent, its highest in 11 years.

It is “totally premature” to talk about cutting the rate, she emphasized. Keeping rates where they are “for a sufficiently long duration” will force inflation down to the bank’s 2-percent target and “rates will be set at sufficiently restrictive levels for as long as necessary,” Lagarde said.

“The bar for another hike is high but the bar to start cutting is even higher,” economist Ann-Katrin Petersen at the Blackrock Investment Institute told the FT.

The bank also is monitoring the Mideast war’s impact on energy prices. A spike in fuel costs sparked an economic crisis across Europe last year.

“She could have stressed the upside risks to inflation from the Mideast situation a bit more, given we’ve just had a big energy shock [the bank] massively underestimated,” analyst Dirk Schumacher at Natixis bank said to the FT. “I found her quite dovish.”

TREND FORECAST: Europe’s economic slowdown highlights the global economic morass.

Persistently higher interest rates, China’s weakness, and wars in Ukraine and the Mideast will contribute to a Eurozone recession that will begin before mid-2024.

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