A Delicate Balancing Act Amidst Economic Uncertainty

In the realm of European finance, interest rates in the Eurozone appear to have reached their peak, with no immediate rate cuts on the horizon. The European Central Bank (ECB) finds itself at a crossroads, confronted with a complex choice: combatting high inflation or risking an economic downturn.

The European Central Bank (ECB) is set to convene on Thursday, October 26 to announce its decision on interest rates. The consensus in the market suggests that the ECB will maintain its current key interest rates, with the benchmark deposit rate staying at 4.00% and the main refinancing rate at 4.50%. According to Reuters, experts widely agree on this outcome, as none of the 85 economists polled between October 12-19 anticipate a rate hike or cut. The ECB itself indicated in a statement on September 14, 2023, that the previous rate hike likely marked the end of the current tightening campaign, stating, “Based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.”

Prominent ECB policymaker and governor of the French central bank, Francois Villeroy de Galhau, reiterated the importance of avoiding excessive policy tightening, emphasizing the need to maintain the current key interest rate. Octa analysts added, “Whether we like it or not, the Eurozone economy is in the doldrums, and raising borrowing costs now would further burden consumers already affected by external factors.”

The impact of rising borrowing and living costs has led European citizens to cut back on spending. According to Eurostat, consumer confidence remains on a downward trend, and retail sales continue to decline on an annual basis. Although the Eurozone is expected to narrowly avoid a recession this year, its largest member, Germany, is likely already in a recession.

Octa analysts noted the challenging decision the European Central Bank faces on October 26, stating, “The European Central Bank finds itself between a rock and a hard place. There is no easy solution. The ECB would either have to risk triggering a recession or accept the high likelihood of inflation remaining above target for an extended period.” They predict a “hawkish pause,” where rates will remain steady, with the expectation that the ECB will reiterate its “higher-for-longer” approach in the post-meeting statement and press conference.

In its previous meeting, the Federal Reserve (Fed) also opted to maintain its benchmark rate. However, the U.S. economy remains relatively strong compared to its European counterpart. The CME FedWatch Tool even suggests a 35% probability of another rate hike from the Fed in January next year. Conversely, interest rate expectations in the Eurozone are more subdued. While both central banks maintain a hawkish stance, the outcomes they’ve achieved differ significantly, with the U.S. economy proving more resilient while the Eurozone struggles.

Octa analysts highlighted the monetary policy divergence between the U.S. and the Eurozone, favoring the U.S. dollar and potentially leading to further devaluation of the euro. They mentioned, “A confident break below 1.04450 potentially opens the way towards 1.02000 and then towards parity again. Only an assertive push above 1.07000 would invalidate the underlying bearish trend in EURUSD.”

About Octa

Octa, an international broker, has been delivering online trading services worldwide since 2011. It provides commission-free access to financial markets and offers various services utilized by clients from 180 countries, with over 42 million trading accounts opened. Octa supports clients in reaching their investment goals through educational webinars, articles, and analytical tools. The company also actively participates in charitable and humanitarian initiatives, including improving educational infrastructure and aiding local communities. Octa’s achievements in the APAC region include the ‘Best Forex Broker Malaysia 2022’ and the ‘Best Global Broker Asia 2022’ awards from Global Banking and Finance Review and International Business Magazine, respectively.”