ECB Navigates Slowing Eurozone Economy and High Inflation with Further Rate Hikes Expected

Economic activity in the euro area is slowing due to weaker foreign demand and tight financing conditions. Inflation has declined from its peak but remains high.

The ECB has raised interest rates significantly since July 2022 and expects rates to remain high to ensure inflation returns to the 2% target.

Tighter financing conditions are impacting the economy, but the full effects on growth and inflation will materialize over time. Uncertainty remains around speed and scope of transmission.

Risks are tilted to the downside for growth but upside risks remain for inflation. Wage growth and fiscal policy stances are important to watch.

Assessing transmission requires monitoring real-time financial and economic conditions given uncertainty around historical comparisons and model estimates. Data-dependent approach is key.