Eurozone Enters Recession... 'Baby Step' ECB "May Hold Rates Steady in September"

ECB Raises Key Interest Rate by 0.25%P
Eurozone Faces High Recession Risk, Inflation Hits 5% Range
Contrasts with Optimistic 'Goldilocks' View in the US

The European Central Bank (ECB) followed the United States on the 27th (local time) by implementing a baby step (a 0.25 percentage point increase in the benchmark interest rate). However, unlike the U.S., where expectations for a soft landing of the economy have grown despite the rate hike, a shadow of recession looms over Europe, leading to forecasts that the ECB may hold rates steady at the upcoming September monetary policy meeting.

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On the day, the ECB held a monetary policy meeting and raised the benchmark interest rate to 4.25%. The deposit rate and marginal lending rate were also each increased by 0.25 percentage points to 3.75% and 4.5%, respectively. This marks the ninth consecutive increase since July last year. The deposit rate reached its highest level in 22 years.

In a statement, the ECB explained, "Although the inflation rate continues to slow down, it is expected to remain at a very high level for a prolonged period."

However, ECB President Christine Lagarde left open the possibility of a future pause during the subsequent press conference. She stated, "We remain open-minded about decisions in upcoming meetings," adding, "We may raise or hold rates steady. Future rate decisions will depend on incoming economic data."

The reason President Lagarde did not clearly express a commitment to further rate hikes, unlike before, is due to the rapid slowdown of the Eurozone economy. The Eurozone's economic growth rate contracted by -0.1% in both the fourth quarter of last year and the first quarter of this year, and forecasts suggest it will be difficult to rebound in the second quarter as well. This contrasts with the U.S., where despite slowing inflation, the GDP growth rate reached 2.4% in the second quarter, fueling optimism that the market has entered a "Goldilocks" phase (economic growth without high inflation).

Business sentiment is also deteriorating. The Eurozone's composite Purchasing Managers' Index (PMI) for July was 48.9, marking the lowest level in eight months. A PMI below 50 indicates an economic contraction phase. In particular, Germany, the largest economy in the Eurozone, is expected to enter a recession phase in the second half of the year due to sluggish export conditions.

Meanwhile, inflation remains stubbornly high. The Eurozone's consumer price inflation rate last month was 5.5%, down to half the level of October last year but still significantly above the target rate of 2%. This is nearly double that of the U.S. (3.0%). Additionally, the ECB is concerned that food prices could rise due to Russia's withdrawal from the Black Sea Grain Initiative.

As a result, analyses suggest that the ECB is caught in a dilemma between controlling inflation and stimulating the economy. The Wall Street Journal (WSJ) diagnosed, "The Eurozone has higher inflation and much more vulnerable growth than the U.S.," adding, "It must balance the risks of inflation against the looming threat of recession."

With the outlook for a Eurozone recession deepening, there are also forecasts that the ECB will hold rates steady at the next monetary policy meeting. Jason Davies, Global Rates Portfolio Manager at JPMorgan Asset Management, said, "The ECB is expected to maintain a pause for the time being, and once the labor market weakens and core inflation returns to target levels, it will likely cut rates."

This content was produced with the assistance of AI translation services.