Europe Macroeconomic Update: A Few More Rises in Interest Rates Amid Inflation Persistence
In this latest edition of the DBRS Morningstar Macroeconomic Update for Europe, we discuss how inflation persistence may prompt the European Central Bank and the Bank of England to raise interest rates further.Key Highlights
EURO AREA
• As interest rates increase, credit growth has started to slow. Energy prices have fallen but core inflation remains sticky, pointing to further monetary tightening in the coming months.
• With the energy crisis fading and the labour market remaining strong, confidence has improved, but we expect economic growth to be increasingly weighed down by rising interest rates.
• In our view, downside risks to the growth outlook this year include unexpected stresses in the banking sector, a severe drought in Europe leading to higher food prices, tighter financial conditions than currently envisaged, or an intensification of global geopolitical tensions.
UNITED KINGDOM
• The effect from higher interest rates in the UK has been notable already, affecting the housing market and consumption. Tight financial conditions will continue to weigh on growth.
• The Bank of England's tightening cycle seems to be approaching its end, although inflation persistence is pointing to yet another interest rate hike in May.
• In our view, downside risks to the UK economic outlook in the near term include renewed financial market turmoil, even more persistent inflation, tighter-than-expected financial conditions, and an intensification of global geopolitical tensions.
“The full effect of monetary tightening on the overall economy is yet to be seen,” said Adriana Alvarado, Senior Vice President in the Global Sovereign Ratings Group. “But the still high inflationary pressures in both the euro area and the UK means that the respective central banks will remain focused on bringing inflation down. We expect a few more rises in interest rates in the coming months, especially in the euro area. Monetary tightening in the UK has already been substantial.”
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