The ECB announced another hike in interest rates last week, with the main refinancing rate hitting 4.5% and the deposit rate equalling its all-time high of 4.0%. The last time the deposit rate was that high was more than 20 years ago, so soon after the euro’s creation that physical coins were not even in circulation yet. Given the material risks of a recession in the single currency bloc (Fathom judges these to be in excess of 50% over the coming twelve months), the central bank is unlikely to hike much further, and may soon find itself cutting rates. The recession risks arise from two main sources: the delayed impact of higher rates and the lingering cost-of-living crisis. Data released last week showed that the crisis in living costs has not yet passed, with nominal wage growth slowing from 4.9% in Q1 to 4.6% in Q2, and real wages remaining negative. Overall, Fathom sees a greater than 60% chance that the euro area suffers a recession within the next year.
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