The tightening cycle nears its end, but elevated lending rates are set to persist

While we continue to expect a gradual improvement in growth across Europe, multinationals should note that the combination of tight monetary and fiscal policies will continue to weigh on the operational environment and prevent a more substantial acceleration in activity. The outlook throughout H1 2024 remains dim, and higher lending rates will continue to complicate access to financing, especially as it pertains to distributors and local partners. Executives should continue to approach European markets on a sub-regional and sub-segmentation level to identify new business opportunities and should ensure their existing supply chain can absorb some of the increase in borrowing costs.


  • The European Central Bank (ECB) introduced another hike of 25 basis points, bringing the key policy rate to 4.25% amid persistent inflation.
  • The Bank of England (BOE) hiked at a smaller-than-expected rate and brought the key policy rate to 5.25% from 5.0%.
  • Inflation expectations across the eurozone have eased substantially, but inflation swaps suggest that inflation is set to remain above the ECB’s target of 2.0% YOY until 2025.
  • In the meantime, the BOE has indicated that food inflation is likely to remain elevated at around 10.0% YOY by the end of 2023 and will be persistently high through 2024.

Our View

While the BOE has abstained from a steeper hike, another 25-basis-point increase in September 2023 remains highly likely, which will see the key policy rate reaching 5.5%. In the meantime, easing inflation expectations have given the ECB some breathing room, but policymakers may still decide to introduce another hike in September if they see indications of stickier inflation. Expectations that inflation will stay above central bank targets for longer, however, confirm our view that both the ECB and the BOE will come under increased pressure to maintain the high rates for longer despite small cuts in 2024 that should bring rates to 3.75% and 4.0%, respectively, by the end of the year.

The higher lending rates have also likely not hit European economies fully, as the hikes’ transmission likely occurs with a four- to five-month lag. This will likely present a real conundrum for policymakers, as budget tightening in 2024 will see a combination of tight fiscal policy and high lending rates that will weigh on economic activity and prevent a more notable acceleration in growth. While we do not expect the combination of the two to lead to a recession, activity is set to remain relatively weak and should accelerate only at the end of 2024.

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