Euro zone inflation has reduced to its lowest point in nearly 2 years after the European Central Bank hiked rates for the 10th time.
The euro zone annual inflation level fell to its lowest this month, since October 2021. Annual inflation fell to 4.3%, down from 5.2% in August. Also, core inflation fell from 5.3% in August to 4.5% in September. Core inflation excludes energy, food, alcohol, and tobacco.
The reduction in inflation comes after the European Central Bank (ECB) decided to increase its main interest rate for the 10th consecutive time. The increases have now pushed Europe’s interest rate to a record 4%. Fortunately, observers suggest the ECB would likely pause hikes for a while.
The European Central Bank projects that the average inflation for the euro zone would be about 5.6%. However, the apex bank is optimistic that this will fall to 3.2% in 2024 and 2.1% in 2025.
As for rate cuts, there have been no official pointers as to when this would begin. The French central bank Governor Francois Villeroy de Galhau said the interest rate in the euro zone should stay at its current level for a “sufficiently long period of time.” According to the Governor, betting now on when the interest rate would drop is “probably premature”. Nonetheless, he noted that rate changes are dependent on data and authorities are willing to “react in both directions”.
These events, as well as comments from de Galhau, already indicate poor growth. According to the ECB, the euro zone growth for 2023 would be 0.7% this year, 1% next year, and 1.5% in 2025.
Interest Rate Hikes Suspended as Euro Zone Inflation Falls
Economists polled by Reuters believe that the euro zone interest rates will remain unchanged for a few months. According to the poll, the ECB is unlikely to alter these rates until at least July 2024. All the 70 economists Reuters polled said the euro zone would end the year at a 4% interest rate. According to the median of 32 economists, the probability of at least one more hike in 2023 is 20%. Responses varied between 5% and 35%.
Speaking on the likelihood of a hike in rates, Deutsche Bank chief economist Mark Wall said:
“It will probably be some time before the ECB will describe it as such, but 4.00% is likely to be the terminal rate, in our view. President Lagarde apparently did not want to say rates have peaked…However, the hurdle to a further hike does feel relatively high.”
According to the EU statistics agency Eurostat, estimates for headline inflation in September is 5.6% for France and much lower for Spain at 3.2%. However, Slovenia and Slovakia are much higher at 7.1% and 8.9%, respectively.
In England, the apex bank has decided to suspend rate hikes after 14 consecutive increases. According to reports, the Bank of England has ended the streak with an interest rate of 5.25%. England has been battling heavy inflation and has been increasing its interest rate since 2021. Interestingly, 4 members of the Monetary Policy Committee indicated they would prefer an increase of 25 basis points to 5.5%.
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