ECB set to halt rate hikes as Mideast war casts a shadow over economy

The European Central Bank is prepared to leave interest rates unchanged on Thursday for the first time in more than a year, as the war between Israel and Hamas spreads further gloom over the already bleak outlook for the European economy.

It would be the bank’s first meeting without change after a torrid pace of ten consecutive increases through July 2022, pushing the policy rate to a record high of 4 percent. The ECB would join the US Federal Reserve, the Bank of England and others in keeping borrowing costs stable, albeit at their highest levels in years, as inflation has eased.

In Europe, inflation peaked at a painful 10.6 percent in October for the 20 countries that use the euro, as Russia’s war in Ukraine took its toll. Those high prices have been a poison to consumer spending, draining household finances, adding to the costs of necessities such as food, heat and electricity.

But with inflation having fallen to 4.3 percent, analysts expect the ECB to postpone further hikes at its meeting in Athens. It is one of the bank’s regular gatherings outside its Frankfurt headquarters, aimed at underlining its status as an institution of the European Union.

Now concerns are increasing about weakening economic growth and even the risk of a recession. Rate hikes are a central bank’s main weapon against inflation, but they can depress economic growth by raising the cost of credit for consumer purchases, especially homes, and for businesses to buy new equipment and facilities.

Surveys of purchasing managers from S and P Global show that economic activity fell in October. Analysts at ABN Amro predict a decline in economic output in the eurozone of 0.1 percent for the July-September quarter and a decline of 0.2 percent for the last three months of the year. The EU will publish third-quarter figures on Tuesday.

The impact of inflation on consumers was a key reason why Europe shaved just 0.1 percent growth in the first two quarters of this year. The International Monetary Fund predicts that the largest economy, Germany, will shrink by 0.5 percent this year, making the country the worst-performing major economy in the world. Even Russia is expected to grow this year, the IMF says.

And there is little prospect of improvement for Europe this year. The war in the Middle East has threatened to send oil prices soaring, although there has been no huge spike or disruption in supply so far. But the conflict adds uncertainty as Europe relies heavily on imported energy, which could be hit if the war between Israel and Hamas spreads to Iran or its proxy fighters in Arab countries.

The ECB will be in no hurry to take further action, said Carsten Brzeski, global head of macro at ING. Instead, the country will use a welcome break to wait for more data on the delayed impact of interest rate hikes so far and oil price developments.

The emphasis has shifted to how long interest rates will remain at record highs. ECB President Christine Lagarde has reiterated the bank’s message that interest rates have now reached a level that, if maintained for a sufficient period, will make a substantial contribution to the timely return of inflation to the 2 percent target is considered best for the economy.

That was taken as a signal that the ECB had finished raising rates, although some analysts did not rule out a final rate hike in December if the expected fall in inflation does not materialize.