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After nearly two years of aggressive interest rate hikes to combat high inflation, several European central banks opted to pause further increases in September. However, they caution that rates must remain restrictive for an extended period to quell rising prices.

The moves come as economic growth slows across the region. Central banks now face a “triple dilemma” of balancing inflation risks, recession worries, and the delayed impact of massive rate hikes already enacted.

U.K. Central Bank Holds Rates After 14 Straight Hikes

The Bank of England (BOE) voted 5–4 to keep its benchmark rate unchanged at 2.25% following 14 consecutive hikes. The pause indicates the bank may have reached its peak rate for this cycle.

UK inflation fell to 9.9% in August, below the 11% forecast. Some policymakers cited signs of moderating wage growth and economic weakness as reasons to halt rate increases.

However, BOE Governor Andrew Bailey said the bank would “watch closely” for persistent inflation and could raise rates again if needed. Most economists expect rates to remain elevated through 2023 before cuts materialize.

The decision highlights the BOE’s delicate balancing act. It wants to restrict financial conditions to control inflation without triggering a deeper downturn. The UK economy already contracted in Q2 2022.

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Swiss Central Bank Holds Rates After Hiking Cycle

Similarly, the Swiss National Bank (SNB) held its policy rate steady at 0.5% in September after a series of hikes. But SNB Governor Thomas Jordan emphasized “the war against inflation is not yet over.”

The SNB forecasts average annual inflation of 2.2% in Switzerland through 2024 even with rates held at current levels. Further tightening could occur to rein in prices.

Jordan said the SNB would monitor data and international developments. Switzerland’s inflation rate of 1.6% remains within the 0–2% target range.

Analysts described the decision as a “hawkish pause” given the SNB’s hawkish messaging. The bank appears ready to act decisively if inflation persists despite economic stagnation.

ECB Hints Rates Near Peak After “Dovish Hike”

The European Central Bank (ECB) lifted rates by 0.75% as expected but said they “have reached levels that will make a substantial contribution” to hitting its 2% inflation target.

ECB President Christine Lagarde explained rates are nearing a “landing point” and will remain elevated to ensure inflation keeps falling. The ECB raised its key deposit rate to 1.25%.

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Lagarde acknowledged the eurozone economy is slowing amid an energy crisis, the war in Ukraine, and lingering supply chain issues. The ECB slashed its 2023 GDP growth forecast to 0.7%.

Despite the gloomy outlook, Lagarde reiterated the ECB’s commitment to curbing record-high inflation, even at the cost of an economic downturn. But the ECB left the door open to pausing hikes soon given growth risks.

Nordic Central Banks Hike But Hint at Peak Rates

Both the Norges Bank of Norway and Riksbank of Sweden opted to lift rates in September but suggested they may be near peak levels.

Norway’s central bank hiked 25 basis points to 2.25% but said “there will likely be one additional policy rate hike” before holding steady. Governor Ida Wolden Bache explained “there will likely be a need to maintain a tight stance for some time ahead.”

Similarly, the Riksbank increased its benchmark to 1.75% and indicated it expects “to raise the rate further over the coming six months.” Riksbank Governor Stefan Ingves said one or two more hikes are probable through early 2023.

The messaging indicates both banks are approaching terminal rates to brake inflation running above 6% in the region. But weakening domestic demand may limit further tightening despite inflation overshoots.

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Oil Prices, Strong Dollar Complicate Policy Outlook

The recent surge in crude oil prices poses an additional challenge for European central banks seeking to tame inflation.

Higher energy prices flowing through to transportation, utilities, and food are exacerbating cost of living strains for European households and businesses. This could force central banks to maintain restrictive policies even amid economic weakening.

Meanwhile, a strong U.S. dollar driven partly by Fed rate hikes continues depressing European currencies like the euro and Swedish krona. This increases import costs and complicates policy paths.


After nearly two years of historically rapid tightening, European central banks are approaching the end of their rate hike campaigns as the focus shifts to calibrating the trajectory back down.

With inflation still painfully high but economies deteriorating, balancing price stability and growth will require deft policy maneuvers in coming months. Any persisted inflation or growth shocks could upend expectations for when rate cuts finally arrive.

Stay with us for the latest economic news as European central banks navigate delicate decisions ahead in their fight against inflation while trying to avoid recession.

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