The European crisis is getting worse as the ECB raised interest rates on Thursday. Inflation remains high across the Eurozone.
At its Thursday meeting, the European Central Bank increased interest rates at record-high levels. This was a largely expected move, accelerating the pan-European crisis to curb inflation.
Eurozone inflation is expected to cool at 5.3% in August, a 0.2% decline compared to the previous month. Summer tourism is likely the cause of such a slight decline in inflation, as the hot season normally coincides with a spending spree.
Nevertheless, the European Central Bank does not take lightly small inflation declines. Consumer prices are still far above the 2% ECB target, hence why markets widely expected another hike.
Now, interest rates have jumped to 4%, reaching the highest level in the 20-year lifespan of the euro.
Following the meeting, CNBC revised European inflationary projections to 3.2% for 2024, slightly higher than before. Their staff however calculated lower consumer prices for 2025, bringing them to 2.1%.
Therefore, there could be a narrow window of opportunity to cut interest rates at the end of 2024, though the ECB will likely let it pass.
ECB governor Christine Lagarde, however, signaled an end to interest rate hikes. “Based on its current assessment,” the ECB said in a statement, “the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.”
The recession is getting worse
The main reason the ECB now wishes to pause rate hikes is the risk of making the current Eurozone recession worse.
The Eurozone fell into a recession back in June, closely following the same announcement by Germany, the bloc’s largest economy. After Germany, the Netherlands soon followed through with a recession.
This recession followed fewer than two years that of Covid, worsening the European economic outlook as well as its position on the world stage.
This recession, especially in Germany, was caused by the illegal Russian invasion of Ukraine, which disrupted energy supplies to Europe and bogged industries down.
The war in Ukraine also worsened inflation, forcing the European Central Bank to raise rates more violently, therefore accelerating a recession.
The United Kingdom, though not in a recession, has a higher inflation rate than the European Union. The Bank of England is likely to increase interest rates at their meeting next week, despite GDP falling during the summer.
On the other side of the Atlantic, the Federal Reserve will also hold its meeting next week. Contrary to Europe, the United States is experiencing a period of sustained growth and relatively low inflation, likely prompting the Fed to halt hikes.