Recent announcements, however, suggest a much more predictable environment is on the horizon
The most recent hikes are in line with FrontierView’s expectations and underline the difficult operational environment that MNCs and their customers are likely to face through 2023. Rising lending rates and a notable easing in economic activity are likely to present issues not only on the demand side, but also when it comes to the ability of channel partners, who have previously benefited from a low interest rate environment, to tap into additional financing. MNCs should ensure these considerations are reflected in their 2024 strategy, especially considering relatively high lending rates are there to stay until 2025. The gradual introduction of cuts in Q4 2023, which will accelerate in H2 2024, should offer some respite and ensure the continuous recovery of demand throughout Europe.
Overview
- The European Central Bank (ECB) raised the refinancing operations interest rate by 50 basis points to 3.0% at the beginning of February, with the deposit facility rate seeing an increase to 2.5%.
- Policymakers signaled that another rate hike of 50 basis points in March 2023 is imminent.
- The Bank of England (BOE) also hiked rates by 50 basis points to 4.0%, with policymakers signaling that inflationary risks persist and could prompt further tightening.
Our View
The recent hikes by the BOE and the ECB have been priced in by markets, and recent announcements from monetary authorities suggest a much more predictable environment going forward. Despite seemingly hawkish statements, with policymakers signaling they are ready to move decisively should inflationary pressures persist, the cycle of tightening is clearly approaching an end. The ECB’s March hike is likely to be its last, especially in light of slowing eurozone inflation, which declined by 0.4% MOM in January 2023. The ECB will likely adopt a wait-and-see approach in the upcoming quarters and will be much more cautious, given the strong macroeconomic headwinds experienced by the eurozone and mounting concerns regarding the labor market. Should, as our base case maintains, policymakers see a more pronounced easing in inflationary pressures in Q4 2023, the ECB will likely introduce a small cut of 25 basis points, with interest rates likely to be eased further through 2024.
The tightening cycle is coming to an end in the UK, as well, with one more hike expected at the beginning of Q2 2023, which should bring the key policy rate to 4.25%. The BOE is likely to introduce a small cut in Q4 2023, similar to the ECB, which will be followed by a much more pronounced cycle of cuts through 2024 and bring the key policy rate to 3.0% as policymakers seek to minimize the shock to the labor market and encourage a stronger rebound in lending activity into H2 2024. Tighter rates in the UK have already led to a small decline in annual business lending of 0.1% YOY, with credit activity set to contract further in 2023. Consumer credit will likely see a small annual increase, as consumers rely increasingly on borrowing to sustain expenditures, but the high lending rates will ensure greater price sensitivity and cuts in major purchases.
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