The European Central Bank (ECB) keeps pressing ahead in its battle against rising inflation. On Thursday, the Governing Council raised the euro area’s official rates by 0.75 percentage points, bringing the key rate to 2.0 percent. This is the highest level seen since January 2009. Mortgage and new loan costs are set to climb further, a trend that began late last year and has continued into 2024.
The central bank signaled that another large move could be on the horizon, matching the heightened expectations from markets and analysts. The latest increase follows a sequence that began last September, when the ECB first pushed rates higher after a period of accommodation. It marked the largest rise in the bank’s 23-year history, with a 0.75 point hike. By July, Christine Lagarde’s presidency had already started a tightening cycle that included a 0.5 point move, the biggest single increase in more than a decade and larger than what was anticipated in June.
In addition, the ECB raised the interest banks receive for deposits to 1.5 percent, a move that began in September to encourage savings and liquidity management within the banking system. The bank has warned that further steps to tighten credit conditions will be necessary at the next meetings of the Governing Council, spanning October through February, as inflation remains a persistent problem.
The Spanish economy is forecast to slip into a technical recession by the end of the year, according to the tax authority’s latest outlook.
without ceasefire
Like many major central banks, the ECB began its rate hikes later than others such as the U.S. Federal Reserve, initially framing the price pressure as temporary in 2021. The war in Ukraine abruptly intensified inflation, leaving policymakers with little room for delay as price pressures persisted.
The euro area’s consumer price index hit record highs in September, with a year-over-year rate near 10 percent. Earlier forecasts were revised higher as the ECB projected an average inflation rate of about 8.1 percent for 2022, then easing to 5.5 percent in 2023 and around 2.3 percent in 2024. These revisions move the region away from the 2 percent midterm target used to guide policy.
stagnation drums
Economic activity has felt the bite from higher inflation and tighter financial conditions. Even with unemployment near historic lows in the euro area and quarterly growth modestly positive, a mix of leading indicators suggests some sectors are cooling. In July, the ECB projected growth of about 2.8 percent for the year ahead and 2.1 percent for the following year, with a more cautious stance in September at 3.1 percent, 0.9 percent, and 1.9 percent for the years ahead.
The energy shock remains a central constraint. The combination of reduced gas supply from Russia and diversified sources elsewhere has meant energy costs stay high, pressuring the economy further. This backdrop reinforces the expectation that the euro area could face a period of slower growth or even a mild recession next year, depending on how energy prices and supply evolve and how monetary policy balances inflation against growth.