Raising Rates, Flirting with Recession?

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The ECB raised interest rates by 25bps to a record high of 4% during its meeting on September 14 – its 10th hike in a row. But at the same time, the central bank acknowledged progress in reducing inflation, and gave a strong signal that it will, barring any significant upside surprise for inflation, now remain on hold for the foreseeable future. 


The rate revision largely reflects higher energy prices. Core inflation too has been revised down, suggesting that the ECB does not expect significant second round effects from higher energy prices to materialize (i.e. additional pressure on underlying inflation).


While inflation indeed remains the key variable to watch, there are tentative signs that things are moving in the right direction. Core inflation momentum is easing thanks to weakened demand, less price pressure and improvement in supply chains. Growth, at the same time, is expected to “remain sluggish” in the near term and to pick up only in 2024. 


While the eurozone economy has been on the edge of recession for several months, Natixis CIB economists do not anticipate this to materialize given the fundamental drivers, including growth of private consumption, that should support the economy going forward. At this juncture, while market expectations have increased and now foresee 3 rate cuts next year starting in June, we anticipate a less aggressive, “higher for longer” scenario, with rate cuts coming only in September and December. 


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