European central banks will introduce additional hikes to tame both inflation and currency pressures
The tighter monetary environment will put additional pressure on MNCs’ partners and key customers. Higher lending rates will not only depress investments but will also have a strong negative effect on consumption. While the shock to labor markets is unlikely to be structural, and employment should rebound at the beginning of 2024, MNCs will see pronounced weakness in domestic demand across the eurozone and the UK, especially through H1 2022, with the weakness continuing to linger well into 2024.
- The Bank of England raised the policy rate by 75 basis points to 3.0% during the November 2022 meeting.
- The move comes on the heels of a European Central Bank (ECB) hike in October, which brought up the eurozone’s key policy rate to 2.0%.
- The US Federal Reserve also raised the key policy rate to 3.75–4.0%, prompting renewed pressure on central banks across the region.
- The ECB has underlined its intentions to raise rates further despite the incoming recession of 2023.
The Fed’s more hawkish stance and our expectations that US interest rates are likely to reach 5.75% by the end of Q1 2023 and extend throughout the year will put significant pressure on European central banks, which will need to introduce additional tightening to prevent further currency depreciation. While the tighter rates are set to exacerbate economic pressures and deepen the recession across Europe, growth across the eurozone should still see a gradual recovery through 2024.
- European Central Bank (ECB): The ECB will likely raise interest rates to 3.0–3.5% by the end of Q1 2023 in a bid to tame inflationary pressures and prevent a sharper depreciation of the EUR in the face of a more hawkish Fed policy. ECB policymakers will, however, remain relatively cautious and try to avoid further tightening, considering the increase in bond yields across the eurozone and the expected shock to the wider European labor market. The ECB is likely to cautiously begin to cut rates at the beginning of Q4 2023, but the key policy rate will remain historically elevated well into 2024, reaching 2.5%.
- Bank of England (BOE): The BOE will raise the key policy rate to 4.0% in Q1 2023 and introduce a cautious cut of 25 basis points only at the end of Q3 2022. The surge in interest rates will dampen consumption and lead to a contraction in property prices, as demand for new construction declines. The increase in interest rates will also lead to an uptick in unemployment, which will further bite into households’ incomes and contribute to the notable decline in consumer spending. The BOE will likely ease monetary policy further in 2024, bringing the rate down to 2.5% by the end of Q4, but overall lending rates will remain elevated and continue to weigh on economic activity.
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