On Thursday, European central banks joined the US Federal Reserve in slowing the pace of interest rate hikes as inflation, which has been high for decades, shows signs of easing.
Both the Bank of England and the European Central Bank raised rates by half a percentage point at their final meetings of the year. Previously, they opted for increases of three-quarters of a percentage point.
But they insisted the fight to tame inflation is not over, despite the risk that further rate hikes next year will add to the pressure on a slowing economy.
The UK is already sliding into recession and Europe may not be far behind.
The ECB said the GDP of the 19 countries that use the euro could contract this quarter and the next due to high energy prices, continued uncertainty, weak global activity and tighter financial conditions.
According to the bank’s projections, a recession “would be relatively short and shallow”, she added.
Both central banks have signaled they plan to continue raising interest rates in the new year to keep inflation at their 2% targets.
“We still have a long way to go,” ECB President Christine Lagarde told reporters at a press conference, noting that inflation “remains far too high and is likely to remain above the goal”.
ECB inflation estimates show it to average 3.4% in 2024 and 2.3% in 2025.
Central bankers sought to convey that they were not changing course, sending a message to investors that they aimed to stay firm.
“We are not pivoting,” Lagarde stressed. “We don’t hesitate.”
But early indications that prices are rising at a slower pace are making it easier for policymakers to start going at it, after an unprecedented sprint over the past 12 months.
UK annual consumer inflation was 10.7% in November, down from 11.1% in October. In Europe, consumer prices increased by 10% over the year to November, compared to a record 10.6% in October.
The Bank of England has now raised borrowing costs in nine consecutive meetings from December 2021. Its biggest hike in November was the biggest in 33 years.
The European Central Bank has hiked rates four times in a row since July. He’s opted for bigger hikes in his last two encounters.
The ECB also announced plans to start cutting its bond holdings in March by around 15 billion euros ($16 billion) per month until the end of June.
The challenge for central bankers is to use their policy levers to slow consumer demand, thereby helping to reduce inflation, but without hurting it to the point of triggering a painful recession.
This task is made even more difficult by the factors that contribute to inflation. High energy prices exacerbated by Russia’s war in Ukraine are creating huge problems for Europe and the UK. But governments have pledged to end their dependence on Russia for oil and gas. This could make prices more volatile over the next year.
Earlier this week, the head of the International Energy Agency, Fatih Birol, and the President of the European Commission, Ursula von der Leyen, warned that Europe could face further shortages of natural gas in 2023.
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