Looks like interest rates have peaked, but has the ECB gone too far?

Euro zone inflation has fallen sharply, indicating tough medicine may be working, though rate cuts may still be some way off

After the latest interest rate increase by the European Central Bank, the 10th since summer 2022, more hawkish members of the governing council were warning that another rise could yet be needed. The latest inflation figures for the euro zone indicate that this was probably incorrect.

The figures showed a sharp fall in euro zone annual inflation to 4.3 per cent in September, from 5.2 per cent in August, a bigger decline than most analysts had anticipated. Stripping out volatile energy and food prices, so-called core inflation was measured at 4.5 per cent. It is still significantly above the ECB target of 2 per cent, but the generalised fall in price pressures and separate credit figures would suggest that higher interest rates are having the intended impact.

Markets are betting that the next move in rates will be downwards, but that could still be some time away, perhaps some time in the second half of next year. For now, the clear message will be that interest rates will stay as high as necessary, for as long as necessary. Nonetheless, EU government bond markets, which have had some difficult days recently amid pressure on Italian debt in particular, calmed after the inflation data.

A key question is whether, rather than not doing enough, the ECB has actually gone too far, unnecessarily endangering economic growth by hiking rates too quickly.


The EU economy looks set to shrink in the third quarter and the latest economic signals from Germany, in particular, have been poor. The truth is that there is no rule book on how to respond to the kind of inflation surge we have seen, nor any guarantee that the ECB can succeed in getting it under control without imposing economic damage.

The latest data may also contain a warning sign for Ireland, where inflation edged up to 5 per cent in September. While core inflation here is at the same level as the EU average, it is important for competitiveness that inflation here drops roughly in line with the EU average in the months ahead.