ECB Says Impact of Rate Hikes To Peak in 2024

15 May 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – The economy should feel the biggest impact of the European Central Bank’s recent flurry of rate rises next year, the central bank said on Monday.

A pre-release from the third Economic Bulletin of 2023, due out on Friday, said that ‘most of the impact [of monetary policy] on inflation is expected to be seen in the period from 2023 onward, with that impact peaking in 2024’.

Rate hikes ‘can be expected to exert substantial downward pressure on real activity and inflation over the period 2023-25’, the article said. Research conducted by six ECB economists showed that the ‘tightening of policy is estimated to have lowered inflation by around 50bp in 2022, while the downward impact on inflation is expected to average around 2 percentage points over the period 2023-25’.

‘The transmission to economic activity is faster, with the impact on GDP growth expected to peak in 2023 and a downward impact of 2 percentage points on average over the period 2022-25’, the ECB said.

However, the ECB cautioned that ‘impact estimates are surrounded by significant uncertainty’.

‘The pandemic, the large energy shock, the fiscal responses to those two events and the unprecedented pace of the tightening of monetary policy are all likely to affect economic decisions and structures in ways that go beyond the historical regularities captured by available models’, the article said.