So is that it? Are we there yet? The European Central Bank (ECB) has just announced its 10th interest rate increase in as many meetings, the most rapid rise in its history.
There are clear hints in its statement that rates may now be at their peak, though of course enough wriggle room is left to increase again if needs be.
It was clearly a close call this time between the more hawkish council members pushing for another – and possibly final – rise and others arguing that the central bank should hold fire and wait to see what the economic data shows before its next meeting. Two key – interlinked – factors may have swung the balance.
One was updated ECB forecasts showing inflation averaging 3.2 per cent next year, still well above the 2 per cent target. The second was the recent increase in oil prices, which is pushing up prices at the pumps.
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The argument to stay put was based on the weakening state of the euro zone economy, with all the main forecasters, including the ECB itself, cutting their growth forecasts amid signs of manufacturing weakness, a tailing off of growth in services and a sharp fall in credit driven by higher rates. ECB forecasters expect euro zone growth of just 0.7 per cent this year and 1 per cent in 2024.
ECB president Christine Lagarde, at her press conference, hinted at disagreement when she said that after a long presentation and discussion of the data by the governing council, “some members did not draw the same conclusion”.
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But a “solid majority” of the council supported another increase. Fears of not doing enough to tackle inflation clearly swayed some in the middle ground on the ECB council – enough to push this hike through.
The trade-off, however, was a concession in the ECB statement that interest rates have now reached a level that, “maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to our target”.
This is ECB-speak, hinting that rates may now have peaked, though of course it is followed by language making it clear that rates will be kept at whatever level necessary, for as long as necessary, to get inflation back to target.
There is an out, in other words, but for now this looks like it in terms of interest rate hikes. It will be interesting to see what spin is put on this by the various central bank governors in the days ahead.
There is no doubt that the sharp rise in interest rates is one of the factors that has sharply slowed the euro zone economy, along with the war in Ukraine, the surge in energy prices and the resulting cost-of-living crisis.
If the slowdown turns into a full-scale recession, the ECB will be accused of going too far. It might live with this if it has led to the required fall in inflation. The knottier situation next year would be if euro zone growth remained poor, but inflation remained high as well – so-called stagflation.
In that situation does the ECB impose yet more pain, or sit tight in the hope that, in time, interest rates will do their job and inflation will fall? Borrowers will hope for a more benign scenario, in which inflation eases and the ECB can start to reduce interest rates around the middle of next year – and the financial markets anticipate that this might happen.
The events of the last few years, however, have left the outlook still shrouded in uncertainty and have taught us the limited value of forecasting just about anything.
