**ECB Raises Interest Rates Amid Inflation Concerns**
The European Central Bank (ECB) has signaled a potential halt to the continuous increase in interest rates after raising its key rate to a record 4% last week. This move marks the 10th consecutive interest rate hike by the ECB in an attempt to curb inflation in the fragile euro zone economy. This latest hike, made after careful consideration of updated inflation and economic growth forecasts, could be the highest level reached, according to some experts.
After this hike, discussions have shifted towards the duration for which rates will remain at this level. Economists including Berenberg’s Holger Schmieding echoed this sentiment following the announcement. Analysts at Deutsche Bank predict no cuts before September 2024, implying a 12-month pause at 4%.
However, the outlook for inflation remains bleak. ECB staff macroeconomic projections now see inflation averaging 5.6% this year, up from a previous forecast of 5.4%, and 3.2% next year, increased from an earlier forecast of 3%.
**Potential Challenges to Interest Rate Plateau**
Challenges to maintaining the current interest rate level include the possible spike in oil prices. Crude futures recently climbed to a 10-month high, which could influence the cost of goods and inflation expectations in Europe and the U.S.
Raphael Thuin, head of capital markets strategies at Tikehau Capital, highlighted the possibility of surprisingly strong and resilient inflation, indicating potential further rate hikes. Future macroeconomic data developments will be crucial in shaping this trajectory.
**Federal Reserve’s Stance on Inflation**
Last month, Federal Reserve Chair Jerome Powell indicated that additional hikes were on the table due to deep concerns about a potential acceleration in inflation if financial conditions ease. However, markets remain almost certain that the U.S. Federal Reserve will maintain steady rates in September, with differing opinions on whether another hike will occur this year.
Economists at J. Safra Sarasin forecast a hawkish bias from the Fed, due to relatively strong economic data and persistent inflation. Despite this, they do not anticipate the execution of a final hike by year-end.
**Bank of England: One Final Hike?**
Expectations for the Bank of England are geared towards one final hike in September as it grapples with an inflation rate of 6.8% amid signs of economic strain and talk of a “mild recession.”
BNP Paribas analysts anticipate a final “dovish hike” in September as wage growth and inflation pressures meet softening activity indicators. However, weak gross domestic product data for July and a cooling jobs market are factors that could influence the Bank’s decisions.
James Smith, developed markets economist at ING, suggested a pause is more likely at the November meeting, based on recent Bank of England comments and the expected direction of data flow.
Original Story at www.cnbc.com – 2023-09-18 05:18:58
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