Christine Lagarde, president of the European Central Bank (ECB), announced a new rate decision on Thursday following fresh inflation data.
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FRANKFURT — The European central bank is set to raise its key cash rate by another 25 basis points this week, insisting that any future rate decisions will be strictly data-driven as uncertainty weighs on the outlook for inflation and growth.
“Weaker economic data, significant easing in energy markets and the recent surprisingly sharp decline in inflation point to an early end to the interest rate cycle,” Fritzi Köhler-Geib, chief economist at German bank KfW, said in a research note. clients.
“On the other hand, rising wage pressures and falling but still high inflation expectations call for caution.”
Recent inflation data shows that price dynamics are weakening, but consumer price growth is still too high. Inflation, at 6.1% year-on-year for the headline rate and 5.3% for the core rate, remains too high for comfort in Frankfurt, with wage pressures continuing to intensify. With all of this in mind, the ECB’s new staff projections, which will be released on Thursday along with the rate decision, will be key.
“Risk [for the terminal benchmark rate] they are tilted to the upside by 3.75%,” Mark Wall, ECB watcher at Deutsche Bank, said in a research note. The bank’s benchmark rate is currently 3.25%.
“Inflation was below consensus in May, but core inflation is still high and we expect upward momentum in tourism-related prices in the summer,” he said.
“The ECB may have to wait until September and possibly beyond before it has solid evidence that core inflation is slowing enough to jump or pause the growth cycle.”
Quantitative tightening (essentially cooling bond purchases to stimulate the economy) or accelerating the shrinking of the ECB’s overall balance sheet appear likely to be left out of discussions among policymakers this week. Especially after announcing in May that it would stop reinvesting under its Asset Purchase Program from July 1. The APP is a bond-buying stimulus package that began in mid-2014 to tackle persistently low levels of inflation. It was frozen between January and October 2019 and then lasted until July 2022 – but continued to reinvest payments from assets that matured.
However, the direction of the economy could gain more attention after the eurozone slipped into a technical recession in the second quarter of this year.
There are many uncertainties associated with the growth picture. While sentiment indicators have actually recovered a lot over the past six months, hard data has not.
“The lack of clear signs of an acceleration in the eurozone economy can be explained by the fact that new clouds are rising on the horizon – just as old ones have disappeared,” ECB Natixis observer Dirk Schumacher said in a research note.
“While companies report that ‘equipment as a limiting factor’ is less of an issue when expanding production, weaker demand is increasingly seen as a problem.”
—CNBC’s Silvia Amaro contributed to this article.