Inflation in the Eurozone has slowed to its lowest level in two years as of September, indicating that the European Central Bank’s (ECB) successive increases in interest rates are effectively controlling high prices. The gradual increase in interest rates, however, has impacted economic growth, prompting concerns about a potential recession.
According to Eurostat’s flash reading, consumer prices in the 20 countries using the euro rose by 4.3% in September, down from August’s 5.2%. This marks the slowest growth since October 2021, suggesting a subsiding of inflationary pressures. Additionally, core inflation, which excludes volatile food and energy prices, fell from 5.3% to 4.5%, marking the biggest decline since August 2020.
The ECB’s main interest rate saw its 10th consecutive hike earlier this month, reaching a record level of 4%. The move is part of an aggressive effort to curb rising prices. The ECB anticipates that it may have to maintain higher rates for an extended period to bring inflation down to its target rate of 2%.
The data supports the ECB’s belief that its interest rate hikes are sufficient to reach its 2% inflation target by 2025, following a spike in inflation in 2021. Diego Iscaro, Head of European Economics at S&P Global (NYSE:) Market Intelligence, noted that base effects contributed to the significant decline in inflation and that core inflationary pressures are easing.
However, these efforts have had noticeable effects on economic growth. In August, German retail sales declined and unemployment increased in September, indicating potential economic challenges for the region’s largest economy. Despite these concerns, the ECB still expects an economic recovery in 2023 as lower inflation should lead to a rise in real wages.
The ECB’s economic forecast also hinges on external factors such as China’s decelerating economy not worsening and investment remaining strong. Economist Dirk Schumacher from Natixis cautioned that the rapid increase in interest rates is unprecedented and that relying on old models might not be reliable.
As the Eurozone navigates these challenges, the ECB’s approach to interest rates and inflation will continue to play a critical role in shaping the region’s economic future. The bank has lowered its expectations for real gross domestic product (GDP), with projected annual growth figures at 0.7% for 2023, 1% for 2024, and 1.5% for 2025.
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