Europe's central bank hikes interest rates again even as threat of recession grows - ASSOCIATED PRESS
SEPTEMBER 14, 2023
That comes on top of a slowdown in global manufacturing that is hitting Germany, Europe’s biggest economy, particularly hard.
The eurozone economy has been teetering on the edge of recession since last year, growing only 0.1% in each of the first two quarters of this year.
Yet the economic picture does not resemble a typical recession because unemployment is at a record low of 6.4%. Labor shortages have sent people’s pay higher — one factor complicating the ECB’s inflation fight.
Also weighing on the outlook is a weaker euro against the strengthening U.S. dollar as investors take the view that economic weakness will hit Europe and China. They are betting that the U.S. Federal Reserve might manage a “soft landing” by finishing its rate hikes without pushing the economy into a downturn.
The Fed made its 11th rate increase in July, bringing its key rate to the highest level in 22 years after pausing in June. Economists and investors generally expect the Fed to skip a rate hike at its meeting next week, but it could increase again in November.
Inflation is lower in the U.S. — at 3.7% — than in Europe despite an upward bump from gasoline prices in August.
Central banks around the world have been hiking rates to stamp out inflation that broke out after the sharp economic rebound from the COVID-19 pandemic strained supply chains and Russia’s invasion of Ukraine sent food and energy prices higher.
The Bank of England raised rates for the 14th straight time last month, and markets think it’s more likely than not that the central bank would hike again when it meets next week.
Interest rates combat inflation by raising the cost of credit for things people want to buy, particularly houses, and for business investment in buildings and equipment. That cools off demand for goods and relieves upward pressure on prices.
The flip side is that rate hikes can hurt economic growth if they’re overdone.
David Mchugh, The Associated Press