Europe’s central banks held breath after huge rate hike


  • The Bank of England and the Swiss National Bank kept interest rates steady this month, while the European Central Bank opted against “commissioning a hike” and the central banks of Sweden and Norway hinted that another hike could be on the way.
  • Banks reiterated the US Federal Reserve’s message that inflation remains a threat and that monetary policy should remain in the accommodative zone for a significant period.
  • There is pressure due to high oil prices and economic cracks.

Bank of England Governor Andrew Bailey attends the Monetary Policy Report press conference at the Bank of England in London on August 3, 2023. The Bank of England increased its key interest rate for the 14th consecutive time on Thursday. Up a quarter point to 5.25 percent as inflation in Britain remains high. “Policymakers will continue to closely monitor signs of persistent inflationary pressures,” the BOE said in a statement after a regular meeting. (Photo by Alastair Grant/Pool/AFP) (Photo by Alastair Grant/Pool/AFP via Getty Images)

Alastair Grant AFP | getty images

High inflation continues to plague European households and businesses, and the region’s central banks have yet to declare victory in bringing it to target.

But the tone of their message changed in September, as some central banks paused interest rate hikes after nearly two years, while others were on the verge of peaking. This has drawn the market’s attention to how long rates will remain at current levels amid pressure on economic growth.

This month’s decisions showed that “all central banks are facing the same dilemma: how to balance between slowing economies, still-very high inflation and the delayed impact of unprecedented rate hikes,” the Dutch bank said. said Carsten Brzeski, global head of macro at ING. Told CNBC.

“Of course, the other common theme is that interest rates across all sectors are very close to extremes, which complicates the dilemma described above.”

He said the recent surge in oil prices has become an additional headache, potentially fueling inflation while slowing economic growth — and making future interest rate decisions even more difficult.

The Bank of England opted to pause interest rate hikes after 14 consecutive hikes and kept its key policy rate at 5.25%.

It was a close call, with five members of the Monetary Policy Committee voting in favor of keeping the cap and four voting in favor of an increase of another 25 basis points. The decision may have been prompted by the lower-than-expected August inflation print, which showed year-on-year inflation at 6.7% – well above the BOE’s 2% target, but below the 7% forecast.

The central bank also saw signs of labor market softening, wage growth stagnating and weak economic growth in the second half of the year. Britain’s economy shrank 0.5% in July as the number of late mortgage payments hit a seven-year high.

While BoE Governor Andrew Bailey said the committee would “watch closely to see whether further increases are needed,” several economists said they expected this would represent the bank’s peak rate.

Paul Dales, chief UK economist at Capital Economics, said that, like the US Federal Reserve – which also kept rates steady in September – The BOE “wants the market to believe the long story is higher.”

“The bank does not want the market to decide that it will cut rates too soon after the peak, which would loosen financing conditions and weaken its efforts to reduce inflation,” Dales said in a note Thursday. “

While Capital Economics estimates the rate cut will be implemented in late 2024 and will be “longer and faster than widely expected”, HSBC economists see no rate cut over a 15-month horizon. Meanwhile, Simon French, chief economist at Panmure Gordon believe that Given the lack of “parameters for easing”, it is too early to make any credible calls on the timing of the first interest rate cut.

The Swiss National Bank opted for a pause for the first time after March 2022, saying in a statement that “significant tightening of monetary policy in recent quarters is countering residual inflation pressures.”

Inflation in Switzerland reached 1.6% in August, which is within the national 0-2% target range.

However, SNB Governor Thomas Jordan told CNBC that “the war against inflation is not over yet,” adding that the Swiss central bank would continue to monitor inflation pressures. Jordan stressed that this could include further tightening in December.

Analysts described the latest SNB decision as a “radical pause” given this ongoing caution, and no sign of cuts on the horizon despite Switzerland’s economic stability in the second quarter. The country’s economy is projected to register an average growth of 1% for the year.

The SNB sees annual Swiss inflation averaging 2.2% in 2023 and 2024, then 1.9% in 2025, assuming its policy rate remains at the current 1.75% level.

In contrast, the European Central Bank was described by some as delivering a “definite hike” on 14 September, when it raised rates by 25 basis points, despite suggestions that they had peaked. Will be.

“The Governing Council continues to believe that key ECB interest rates have reached levels that, if maintained over a sufficiently long period, will make an important contribution to achieving the inflation target over time,” the ECB said in a statement. “To be set at a sufficiently restrictive level for as long as necessary.”

The ECB expects growth in the euro zone to be only 0.7% this year and 1% next year, while around 2% growth is forecast for the US in 2023.

Market pricing suggests a more negative economic outlook and an expectation that the central bank could be pushed into cuts by the middle of next year.

The euro has fallen 1.7% against the US dollar so far this month, its worst performance since February. This decline occurred despite increases in interest rates generally increasing the value of the currency.

In northern Europe, Norway and Sweden opted against raising rates on Thursday, suggesting further tightening could be in the offing.

But the decisions also signaled a peak in rates, with Norway’s Norges Bank Governor Ida Volden Bache saying “there will probably be an additional policy rate hike in December.”

“There will be a need to maintain a tough stance for some time going forward,” Bache said.

Norway’s headline inflation rate was 4.8% in August, while headline inflation was 6.3%.

Norges Bank’s forecast now indicates a policy rate of 4.5% through 2024, up from the current 4.25%.

Like other central banks, it flagged uncertainty in its outlook, noting that inflationary pressures and the weakening krona could lead it to raise rates further. A “more pronounced slowdown” in the economy or a sharp decline in inflation, meanwhile, could translate into lower rates.

Separately, Sweden’s Riksbank said inflation was still too high and monetary policy needed to tighten further, as it raised its key rate to 4%.

Sweden’s krona currency has hit record lows against the euro in the past few months. The Swedish central bank said on Thursday it would reserve a portion of its foreign exchange reserves to deal with what it viewed as undervaluation.

Sweden has also experienced a severe downturn in the housing market, and the Riksbank estimates that the national economy will shrink by 0.8% this year and by 0.1% next year. This led Capital Economics to predict a rate cut before the middle of next year, which would be “earlier and faster” than the Swedish central bank.

However, ING’s Brzezski said that given the difficulty in decision-making for all central banks to come, the twin forces of inflationary pressures and weak growth could produce a different outcome.

“Central banks such as the ECB and the Riksbank are most concerned about the long-term impact on their credibility and inflation expectations, which could lead to continued rate hikes,” he said.



Leave a Comment

“The Untold Story: Yung Miami’s Response to Jimmy Butler’s Advances During an NBA Playoff Game” “Unveiling the Secrets: 15 Astonishing Facts About the PGA Championship”