High inflation continues to be a problem for households and businesses in Europe, and central banks in the region are struggling to bring it down to target levels.

However, in September, some central banks changed their approach and paused interest rate hikes after almost two years. This shift has brought attention to how long interest rates will be kept at their current levels, given the challenges faced by the economy.

“All central banks are dealing with the same triple dilemma: how to balance slowing economies, high inflation, and the delayed impact of previous rate hikes,” explained Carsten Brzeski, global head of macro at Dutch bank ING.

“Another common theme is that interest rates in all regions are very close to their peak, which complicates the aforementioned dilemma,” added Brzeski.

The recent surge in oil prices further complicates the situation, potentially fueling inflation while hindering economic growth and making future interest rate decisions even more difficult.

The Bank of England decided to pause interest rate hikes after 14 consecutive increases, keeping its main policy rate at 5.25%.

The decision may have been influenced by lower-than-expected August inflation numbers, which showed a year-on-year inflation rate of 6.7%—above the BOE’s 2% target, but below a forecast of 7%.

The central bank also noted signs of slackening in the labor market, stable wage growth, and weaker economic growth in the second half of the year. The U.K. economy contracted by 0.5% in July, with late mortgage payments reaching a seven-year high.

While BOE Governor Andrew Bailey mentioned the possibility of further rate hikes, many economists believe that the current rate represents the peak.

Paul Dales, chief U.K. economist at Capital Economics, stated that the BOE, like the U.S. Federal Reserve, wants the markets to believe that rates will remain high for an extended period.

Capital Economics predicts rate cuts in late 2024, while HSBC economists do not foresee any decreases in the next 15 months. Simon French, chief economist at Panmure Gordon, believes it is too early to predict the timing of the first rate cut.

The Swiss National Bank (SNB) decided to pause for the first time since March 2022, stating that the significant tightening of monetary policy has counteracted remaining inflationary pressure.

Inflation in Switzerland reached 1.6% in August, within the national target range of 0-2%.

However, SNB Governor Thomas Jordan emphasized that the fight against inflation is not over and that the central bank will continue to monitor inflationary pressures. Further tightening may occur in December.

Analysts described the SNB’s decision as a “hawkish pause” due to the ongoing caution and absence of indications for future cuts, despite economic stagnation in the second quarter.

On the other hand, the European Central Bank (ECB) was seen as delivering a “dovish hike” when it raised rates by 25 basis points on September 14. The ECB suggested that rates may have reached their peak.

The ECB expects minimal growth of 0.7% in the euro zone this year and 1% next year, compared to the forecasted 2% growth for the U.S. in 2023.

Market pricing reflects a more negative economic outlook and an expectation of potential rate cuts by the middle of next year.

Norway and Sweden both opted for rate hikes and hinted at further tightening.

The Governor of Norway’s Norges Bank, Ida Wolden Bache, stated that there would likely be one additional rate hike, possibly in December. She added that a tight stance will likely be necessary for some time.

Norway’s headline inflation rate was 4.8% in August, with core inflation at 6.3%. The Norges Bank forecast suggests a policy rate of 4.5% through 2024.

Sweden’s Riksbank also indicated the need for further tightening, raising its main rate to 4%. The Swedish central bank plans to hedge part of its foreign exchange reserves to address undervaluation of the krona currency.

Sweden has experienced a severe housing market downturn, and the Riksbank projects a contraction of 0.8% this year and 0.1% the next. Capital Economics predicts rate cuts before the middle of next year, while ING’s Brzeski believes that central banks may continue hiking rates due to inflationary pressures.