The European Central Bank would risk plunging the European Union into a long recession if it decides to raise interest rates at its pivotal meeting on Thursday, following the growth downgrades of the bloc by the European Commission.
This is the stark warning from Nigel Green, CEO and founder of deVere Group, one of the world’s largest independent financial advisory, asset management and fintech organisations, after the Commission, the executive arm of the EU, said on Monday that the economy will expand by just 0.8% this year and 1.4% in 2024.
The figures represent a downgrade from predictions by Brussels in May of 1% growth in 2023 and 1.7% next year.
The Commission also said that Germany is set for an extended recession in 2023 – it’s the only major European economy to witness an economic contraction this year.
Nigel Green comments: “It’s reported that the ECB’s decision on whether to raise interest rates or not on Thursday is on a knife-edge. This is because the central bank is having to deal with stalling growth and persistently high inflation.
“But we urge the ECB to refrain from raising interest rates considering the economic context and potential consequences.”
He continues: “The 0.4% contraction in Germany’s economy, coupled with the European Commission’s downward revision of growth expectations, suggests that the trajectory might be less stable than anticipated.
“In such a precarious environment, raising interest rates would further hinder economic growth and job creation.
“The largest economy in Europe is already struggling. Higher borrowing costs for businesses and consumers will further stifle investment and consumption, which are essential drivers of economic recovery. With Germany’s economy facing headwinds, it is crucial to maintain affordable-as-possible financing options to support businesses and individuals alike.
“Due to its size and influence, should the economic situation in Germany get worse due to further rate rises, there’s a real risk that the wider EU could be plunged into a long recession.”
The deVere CEO goes on to add: “The time lag for monetary policies is incredibly lengthy. It takes around 18 months for the full effect of rate hikes to make their way into the economy – and that’s where we are – and so financial conditions will get squeezed even harder in the near term.”
The ECB must also consider the economic divergence within the Eurozone. Raising interest rates could exacerbate disparities and potentially lead to further divergence among Eurozone countries.
It is crucial for the ECB to communicate its intentions clearly, notes the deVere CEO, to the markets and the public. Raising interest rates without adequate explanation could lead to market volatility and confusion, which are detrimental to economic stability.
He concludes: “Despite the risks of steering the wider EU into a recession with another rate rise, we expect that the ECB will argue it is still too soon to pause in its battle against inflation and, therefore, will go for one final hike on Thursday.”