Historic benefit in Europe… and an economy on the verge of recession
The European Central Bank increased interest rates for the 10th straight time on Thursday, pressing ahead in its battle against stubborn inflation even as fears grew that higher borrowing costs could help push the economy into recession.
In her speech during a press conference after the meeting, European Central Bank President Christine Lagarde said: “Inflation continues to decline, but it is expected to remain high for a very long time. We are determined to ensure that inflation returns to our 2 percent target in the medium term in due course.”
The new rate hike of an additional quarter of a percentage point comes at a time when central banks around the world, including the US Federal Reserve, are trying to judge how aggressive anti-inflationary measures will be, and what is the right point to stop the rapid series of monetary tightening before the moment it turns… The economy stagnates and people lose their jobs.
The European Central Bank raised its benchmark deposit rate to 4 percent, a significant rise from negative 0.5 percent just over a year ago, and the highest since the eurozone was founded in 1999.
Interest rates combat inflation by raising the cost of credit for personal consumption, especially homes, as well as business investment in buildings and equipment, which reduces demand for goods and eases upward pressure on prices.
But on the other hand, raising interest rates could harm economic growth if it is exaggerated, as it reduces the ability of institutions and companies to borrow necessary for expansion and investment.
Lagarde explained that the European Central Bank expects inflation to average 5.6 percent in 2023, and 3.2 and 2.1 percent in 2024 and 2025, respectively, which represents an upward revision to expectations for 2023 and 2024 that mainly reflects a higher path for energy prices, and a downward revision. For the year 2025.
She continued: “With the increasing impact of our emphasis on domestic demand and the weak international trade environment, the European Central Bank has significantly reduced its expectations for economic growth. The euro area economy is now expected to expand by 0.7 percent in 2023, 1.0 percent in 2024, and 1.5 percent in 2025.
Meanwhile, growth expectations have continued to deteriorate, and the European Central Bank now expects an expansion of just 0.7 percent in 2023, after forecasting 0.9 percent growth three months ago.
Lagarde said: “The economy is likely to remain weak in the coming months. It remained broadly stagnant during the first half of the year, and recent indicators indicate that it was also weak in the third quarter. Reduced demand for euro area exports and the impact of tighter financing conditions are dampening growth, including through lower residential and business investment. The services sector, which had been resilient until now, is also weakening. “Over time, economic momentum is expected to pick up, as real income is expected to rise, supported by low inflation, rising wages, and a strong labor market…this should support consumer spending.”
The economy in the 20 countries that use the euro has been teetering on the brink of recession since last year, recording growth of just 0.1 percent in each of the first two quarters of this year… and annual inflation of 5.3 percent in the euro zone remains well above… The bank’s 2 percent target, depriving consumers of purchasing power, and contributing to an economic stagnation that has kept growth just above zero this year; These are matters that support the arguments in favor of increasing the interest rate.
High interest rates have hit the real estate market, driving up mortgage interest rates and putting an end to a years-long rise in home prices.
The major European economies – Germany, France, Spain and Italy – also witnessed a contraction in activity last August in the vital services sector, even at the end of a strong tourist summer in Spain and Italy, according to Standard & Poor’s Global surveys of purchasing managers in the services sector. This comes on top of the slowdown in global manufacturing, which is particularly hitting Germany, Europe’s largest economy.
However, the economic picture does not resemble a typical recession, because unemployment is at a record low of 6.4 percent. The labor shortage has pushed up wages, one factor that has complicated the European Central Bank’s fight against inflation.
Also weighing on expectations is the weakness of the euro against the strong dollar, as investors believe that economic weakness will hit Europe and China. They are betting that the US Federal Reserve may be able to manage a “soft landing” by ending interest rate hikes without sending the economy into contraction.
The Federal Reserve increased interest rates for the eleventh time in July, bringing the key interest rate to its highest level in 22 years after temporarily stabilizing it in June. Economists and investors generally expect the Fed to skip raising interest rates at its meeting next week, but it may increase them again in November. Note that inflation in the United States (3.7 percent) is lower than its counterpart in Europe, despite the upward rise in gasoline prices in August in the United States.
2023-09-15 04:52:10
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