Key Points

  • BoE raised interest rates again on June 22 as the economy fights high inflation.
  • It is expected to continue hiking the rates or risk embedding inflation through slow business activity, and possibly recession looms.

Eurozone businesses are caught in a tight zone once more as high-interest rates haunt the economy. It is only expected to worsen from here, at least on a short to mid-term basis, as more hikes must be done to tame rising inflation. This means more pain will be felt in the markets even after the eurozone’s flash composite PMI dropped to 50.3 in June.

High-interest rates start haunting Eurozone businesses

June had a slowdown in business activity in the Eurozone after the area was seen to have had a recession, as Q4 of 2022 and Q1 of 2023 had reversed growth rates. To add to the pain, the inflation in the region is one of the highest recorded in the world, which necessitates further rates hike.

These rates hike to make borrowing more expensive; thus, most businesses start shrinking, which is exactly what has happened in the area. The Stoxx 600 index fell by 1.9% in Thursday’s open in anticipation of the BoE interest hike rate decision. BoE went ahead to hike the rates by 50 basis points, higher than the expected 25 basis points. 

Preliminary data shows that the region will also have a difficult ending in the Q2 of 2022, with its flash composite Purchasing Managers’ Index dropping to 50.3 in June from 52.8 recorded in May. This is a huge dive from the expected 52.5, which concerns as the 50 mark indicates an expansion in activity while a dip below 50 marks contraction.

“Eurozone business output growth came close to stalling in June, according to the latest HCOB flash PMI survey data produced by S&P Global, pointing to renewed weakness in the economy after the brief growth revival recorded in the spring,” S&P Global said in a release.

“Although energy and supply chain worries have eased since late last year, June has seen a further escalation of concerns over demand growth, and in particular the impact of higher interest rates, and the resulting possibilities of recessions both in domestic markets and further afield.”

The European Central Bank has consistently raised rates for the past 12 months to bring down inflation. The consequence of this action is higher costs of business operations in the bloc, which is a drag on productivity. 

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