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So when will Europeís interest rates come down?

If youíre getting fed up with ever-rising interest rates in the eurozone, youíre not alone. The European Central Bank hiked rates for the 10th time in a row. So, now what? INGís Carsten Brzeski has some answers.


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They did it again! Europeís central bank, the ECB, raised interest rates from 3.75% to 4% in September; theyíve never been this high. Itís the most aggressive hiking cycle - as we economists like to call it - the eurozone has ever seen.

So why another repeat performance? Even though there are warning signs almost everywhere that the economy is worsening, the bank is still more worried about inflation. Itís looked into its crystal ball, and thatís telling it inflation, currently running at more than five percent, will only drop below two percent at the end of 2025.

Thatís far too late for the ECB. Itís why itís said, ĎOK, letís do another rate hike now and then keep things where they areí. And that last bitís key. The bank told us that this current level should be sufficient to bring down inflation over the coming couple of years. So itís clear to most of us that weíve hit peak interest rates in Europe.

Higher interest rates are often used to Ďcool downí the economy. If you have to pay more money in interest payments on a loan or mortgage, youíve got less cash to spend elsewhere, which should help bring prices down. And thatís true of individuals, companies and governments. But itís tough on many people who are already struggling to pay increasing food and fuel bills. And for all central banks, itís a tricky balancing act because if you cool down the economy too much, you can actually put it straight into the deep freeze, and weíre back to the dreaded íR-word: recession.

Weíre particularly worried about Germany, often called the powerhouse of Europe. Its industries are producing seven percent less than before the Covid pandemic. Sales in shops as well as exports are all dropping. The risk of recession there, spreading across Europe and beyond, is once again high. And if things get really bad and inflation comes down quicker than expected, we might see interest rates coming down sooner rather than later.

Get more ING views on the global economy on our THINK website at www.ing.com/THINK


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