THE EUROPEAN CENTRAL BANK (ECB) surprisingly hiked the interest rate by 25 basis points. The interest rate on the main refinancing operations, the interest rates on the marginal lending facility, and the deposit facility increased to 4.50%, 4.75%, and 4.00%, respectively. That was the 10th consecutive hike decision by the ECB.
The market mainly didn’t expect a rate hike due to signs of significant deterioration in the growth and unemployment indicators. But the ECB disconfirmed these forecasts. Analysts have started to voice the idea that “this is the end” more powerfully following the decision.
ECB President Lagarde stated at the information meeting after the rate hike decision that the recent indicators suggest the economy has been weak in the third quarter. “The labor market has so far remained resilient, but the momentum in the employment increase is slowing. Most indicators have started to ease regarding the core inflation,” she said, adding that energy and food pose upward risks in terms of inflation. “Weakening demand creates downward risk for inflation. Yet we cannot say that we have come to an end in the rate hike process.”
Inflation, which was negative at the end of 2020, has exceeded 10% in the Eurozone over the past two years. The ECB, which began rate hikes in the spring of last year, could reduce inflation, which broke a record at 10.6% in October. Even if inflation fell to 5.3% in August, it’s still far from achieving the 2% target.
These rate hikes reduced the energy of the economy, which hasn’t already had a strong growth potential. The Eurozone grew by five per thousand in Q2 compared to the previous quarter. The German economy has contracted for two quarters. The PMI index, one of the leading growth indicators, is below 50 in many European countries, and hovers around the weak level of 39.1 in Germany.
The ECB, which decided a rate hike with this outlook, reduced the growth of the Eurozone from nine per thousand to seven per thousand for 2023 and from 1.5% to 1% for 2024.
The weakness in the Eurozone economy and its continuation for a while is a disadvantage for Turkey. Eurozone accounts for 40% of Turkey’s total goods export. The rate corresponds to USD 100bn. Five of the top 10 export destinations of Turkey are in the Eurozone. Turkish exports to Germany, which has been its largest export market of Turkey for many years, totaled USD 20.1bn in 2022.
Although the USD/EUR parity effect has been positive since April, exports to European countries are lower in January-July, year-overyear. USD/EUR rose to 1.13 in July and fell below 1.07 following the rate hike decision.
The downward revision of the growth from 1.5% to 1% for 2024 shows that the import demand of the Eurozone will weaken. The lower growth means a lower increase in consumption and imports.
MORTGAGED HOME SALES DOWN FOR 14 MONTHS
House sales totaled 122,091 units in August, the highest monthly figure recorded this year. However, sales dropped by 1.1% in August, yearover-year.
New home sales and second-hand house sales amounted to 35,310 and 86,781, respectively. New house sales decreased by 9.5%, and second-hand home sales rose by 2.7% in August compared to the same month of the previous year. Mortgaged house sales fell by 26.1% with the hike in loan costs. Thus, mortgaged home sales fell for the 14th consecutive month. But other sales soared by 4.3% last month.
Home sales to foreigners have declined for 14 months since July 2022. Foreigners bought 3,058 houses, which accounted for 2.5% of total house sales. The rate rose to 6% at the beginning of last year.
