The upward cycle of interest rates appears to be over for the major central banks, at least by today’s standards. After European Central Bank (ECB), which left interest rates unchanged on October 26 after ten consecutive increases, corresponding were the decisions of the US central bank (Fed) and her Bank of England (BoE) last week.

While none of these three major central banks have formally declared an end to their synchronized interest rate hikes, essentially all three acknowledge that current interest rates are too high and may lead to the desired inflation target of 2 %.

Markets are now giving a very low chance of further rate hikes and are turning their attention to how long interest rates will remain at their current high levels under the policy of “higher for longer” rates announced by central banks.

How long this period will be will depend mainly on the course of inflation and the intensity of the economic slowdown in the Eurozone and Britain, but also the intensity of growth in the US, where GDP grew by 4.9% in the third quarter.

For the Eurozone, things seem to be clearer as interest rate increases from July 2022, a total of 450 basis points (4.5 percentage points), have brought its economy to a standstill and already in the third quarter on the verge of recession. According to the latest data released by Eurostat last Tuesday, the region’s GDP fell 0.1% (quarter-on-quarter), after a marginal 0.1% increase in the second quarter and zero growth in the previous two quarters.

The contraction in the economy and demand led to a faster deceleration in Eurozone inflation, which eased in October to 2.9% year-on-year from 4.3% in September, while core inflation – which excludes the energy, food, tobacco and alcohol prices – to 4.2% from 4.5%, respectively. Therefore, even if there are some small upward movements in inflation in the coming months due to base effects, its path overall is considered consistent with the ECB’s target of falling to 2% in 2025.

In Britain, where the BoE kept key interest rates at 5.25%, the economy is also teetering between wear and tear, but its inflation was well above target as it ran in September at an annual rate of 6.7%. However, it is estimated that the maintenance of interest rates at current levels for a significant period of time, combined with the high yields of government bonds, will lead to further containment of the economy and demand and, by extension, to a de-escalation of inflation.

More complex is the situation in the US, where interest rate increases totaling 525 bp. they did not cause any slowdown of the economy so far, on the contrary it accelerated in the 3rd quarter. High demand, mainly due to strong American consumption, put a brake on the decline in inflation, which in September was running at an annual rate of 3.7%, as well as in August, while in July it had fallen to 3.2%. On the positive side, however, core inflation continued to moderate, falling to 4.1% in September. Fed Chairman Jerome Powell said there was still no certainty that inflation would move toward the target, but he downgraded central bank officials’ forecast in September for one more rate hike by the end of 2023, saying that since then data has changed.