Central banks in Europe joined the U.S. Federal Reserve on Thursday in slowing the pace of interest rate hikes as decades of high inflation showed signs of easing.
Both the Bank of England and the European Central Bank raised rates by half a percentage point in their last meeting of the year. Previously, they had gone with an increase of three-quarters of a percentage point.
But they stressed that the fight to control inflation is not over, despite the risk that further rate hikes next year could put pressure on the slowing economy.
The UK is already headed for recession, and Europe may not be far behind.
The ECB said GDP in the 19 countries that use the euro may contract this quarter and next Due to high energy prices, ongoing uncertainty, weak global performance and tight financial situation.
According to the bank’s estimates, a recession would be “relatively short-lived and short-lived,” it added.
Both central banks have indicated they expect to continue raising interest rates in the new year to bring inflation back to their 2% targets.
“We have a lot of room to cover,” ECB President Christine Lagarde told reporters at a news conference, noting inflation “remains very high and is expected to remain above target for a long time.”
The ECB’s projections for inflation show an average of 3.4% in 2024 and 2.3% in 2025.
Central bankers wanted to make clear they were not changing course, sending a message to investors that they wanted to stay tight.
“We are not pivoting,” Lagarde insisted. “We are not giving up.”
But early signs that rates are rising at a slower clip allow policymakers to start taking it easy, following an unprecedented sprint over the past 12 months.
Annual consumer inflation in the UK was 10.7% in November, down from 11.1% in October. In Europe, consumer prices rose 10% year-over-year in November, compared to a record 10.6%.
The Bank of England has now raised borrowing costs for nine consecutive meetings in December 2021. Its largest increase in November was the largest in 33 years.
The European Central Bank has raised rates four times in a row since July. It has opted for big raises in its last two meetings.
The ECB also presented plans to start holding its bonds by about 15 billion euros ($16 billion) a month in March until the end of June.
The challenge for central bankers is to use these policy levers to reduce consumer demand, helping to reduce inflation, but not to the point of causing a painful recession.
This task is made more difficult by factors contributing to inflation. High energy prices caused by Russia’s war in Ukraine are creating major problems for Europe and the UK. But governments are committed to ending their reliance on Russia for oil and gas. This could make prices even more volatile over the next year.
Earlier this week, International Energy Agency chief Fatih Birol and European Commission President Ursula van der Leyen warned that Europe could face further shortages of natural gas in 2023.