Caught between stubborn inflation and weakening growth, the European Central Bank faces a close call Thursday on whether to halt its record run of interest rate hikes amid alarming signs that the economy could slide into recession.
The decision comes as the ECB, U.S. Federal Reserve and other major central banks are nearing the end of their swift series of rate hikes aimed at squelching inflation and hoping the damage to economic growth from higher borrowing costs is not too extensive.
ECB President Christine Lagarde has said the latest rate decision will be made based on available data, a switch from the last nine meetings when rate hikes were signaled ahead of time, the AP reported.
Annual inflation of 5.3% in the 20 countries that use the euro currency is still well above the bank’s target of 2%, robbing consumers of purchasing power and contributing to economic stagnation that has kept growth just above zero this year supporting arguments for a 10th straight rate increase.
Pushing the other way is the growing awareness that higher borrowing costs are weighing on decisions by consumers and businesses to invest and spend and are becoming a burden on the economy.
A final rate hike is likely Thursday because underlying inflation is too high to satisfy many members of the bank’s 26-person governing council, said Marco Valli, chief European economist at UniCredit Bank in Milan.
Underlying, or “core” inflation which excludes volatile food and fuel prices is still too high at 5.3% to instill confidence that price increases are safely headed downward.
But Valli added that it was “a very close call.”
Market indicators of future rate moves show many are leaning against an ECB rate hike Thursday.
But an ECB official pushed back against that assumption last week. Governing council member Klaas Knot said markets “may underestimate” the chance of a hike.
Recent signs have been downbeat. The major European economies Germany, France, Spain and Italy saw shrinking activity in August in the services sector even at the tail end of a strong tourism summer in Spain and Italy, according to S&P Global’s surveys of purchasing managers. Services is a broad category that includes hotel stays, haircuts, car repairs and medical treatment.
That comes on top of a slowdown in global manufacturing that is hitting Germany, Europe’s biggest economy, particularly hard.
The economic picture is unusual and does not resemble a typical recession because unemployment is at a record low of 6.4%.
Source: Bahrain News Agency