As the decades-long high inflation shows signs of easing, central banks all over the world are joining the Federal Reserve in moderating the pace of interest rate increases. In their final meetings of the year on Thursday, the Bank of England and the European Central Bank both raised interest rates by half a percentage point. They had previously used three-quarters of a percentage point increments.
Without overtaxing the economy, the central banks are attempting to control inflation.
Europe would not be far behind as the United Kingdom already enters a recession. The ECB warned that poor global activity, rising energy prices, persistent uncertainty, and tighter financial conditions could cause the GDP of the 19 nations that use the euro to decline this quarter and the following.
A recession “would be reasonably short-lived and mild,” the bank’s predictions stated.
Both central banks stated that they anticipate continuing to raise interest rates in 2019. However, after an extraordinary race over the previous 12 months, early signs that inflation may have peaked are allowing officials to start easing up. Inflation among consumers in the UK fell from 11.1% in October to 10.7% in November. Comparatively to a record 10.6% increase in October, consumer prices in Europe increased by 10% from January to November.
Since December 2021, the Bank of England has increased borrowing costs nine times in a row. Its November price increase was the highest in 33 years. In July, the European Central Bank began raising interest rates. At its most recent two meetings, it chose higher rises.
Fed projections
According to projections made public following the bank’s meeting, policymakers on average anticipate that the US economy would expand by just 0.5% in 2019 — far less than historical averages — and that the jobless rate will increase to 4.6%. Even though they anticipate a decline in inflation, the majority of members believe that it will still be higher than the bank’s 2% target in 2025, at 3%.
Overall, they had a more dour attitude than they had a few months prior, which was due to worries that the easy part of the battle against inflation was finished. According to Seema Shah, chief global strategist at Principal Asset Management, “the Fed still remains coy about the possibility of a recession, but given that most Fed officials consider risks to be tilted to the downside, it’s fair to say they are far more worried about the economic outlook than they are willing to admit.”
