Eurozone economy continues to struggle ahead of interest rate decision

(Alliance News) - Eurozone industrial production fell more sharply than expected in July, new figures on Wednesday showed, just a day before the European Central Bank will make its next interest rate decision.

Eurostat's new data shows further signs of a slowdown in the eurozone economy, with the third quarter off to a bad start.

In July, seasonally adjusted industrial production fell by 1.1% month-on-month, after increasing by 0.4% in June. This marks the first fall in four months.

This was worse than FXStreet-cited market consensus, which had expected industrial production to decline by 0.7%.

On an annual basis, eurozone industrial production fell by 2.2%, after a 1.1% slide in June. This was significantly worse than consensus, with markets expecting a 0.3% fall.

"The print sets the stage for another weak quarter for the industrial sector, in line with the recent run of gloomy confidence data and our expectations. Barring surprises, it would be the fourth consecutive quarter of contraction," said Oxford Economics.

Despite signs of economic weakness, inflation remains a concern ahead of a European Central Bank interest rate decision on Thursday.

European Commission President Ursula von der Leyen on Wednesday warned that inflation in the eurozone remains persistently high and will not quickly fall to the ECB's 2% target.

"We know that returning to the ECB's medium-term target will take some time," she said during a speech at the European Parliament in Strasbourg.

The annual rate of inflation in the eurozone was 5.3% in August, below a peak of 10.6% in October last year.

The European Commission predicted inflation would fall to 2.9% in 2024 in its latest forecast published on Monday.

Von der Leyen praised ECB President Christine Lagarde and the Frankfurt-based bank, saying they were "working hard to keep inflation under control".

All eyes are now on the ECB ahead of Thursday's meeting, where the central bank is expected to raise interest rates by 25 basis points, with many believing it will be the final hike in the current tightening cycle.

At its last meeting in July, the Frankfurt-based institution took the interest rate on the main refinancing operations, the marginal lending facility, and the deposit facility to 4.25%, 4.50% and 3.75%, respectively.

It meant the central bank has hiked its policy rates by a cumulative 425 basis points during the current cycle. Another quarter-percentage-point increase would take the three policy rates to 4.50%, 4.75% and 4.00%, respectively.

UBS expects the ECB to deliver a final 25 basis point hike this week but, in light of weak economic data in recent weeks, the Swiss lender acknowledged that the central bank may pause, "leaving the door open for a hike in October".

By Sophie Rose, Alliance News reporter

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