The European Central Bank (ECB) is expected to raise interest rates this week, but there is uncertainty about their future plans. With euro zone interest rates at their highest level in 22 years, financial markets are eagerly awaiting guidance from the ECB. While a quarter percentage point increase is widely anticipated, analysts are divided on whether there will be further hikes in the near future.
The ECB’s previous meetings have provided clear guidance regarding future hikes, but this time, they may adopt a more cautious approach. ECB President Christine Lagarde is likely to emphasize uncertainty and conditionality, suggesting that future decisions will be data-dependent. Some experts believe that the ECB may pause in September to assess updated staff forecasts and signal that inflation is expected to reach its 2% target.
Although headline inflation has cooled in recent months, core inflation remains stubbornly high. This indicates that underlying inflationary pressures persist, making it challenging for rate-setters to achieve their desired drop in inflation. Additionally, the weakening euro zone economy, characterized by a manufacturing recession and sluggish services sector growth, may influence the ECB’s decision-making process.
While the ECB maintains that inflation remains their primary focus, slowing economic growth could sway the opinions of more dovish members. Despite the potential negative impact on the economy, the ECB is likely to prioritize bringing down core inflation.
The tightening of policy has already started to affect financing conditions. Bank lending data reveals a significant surge in borrowing costs, which has begun to impact credit conditions. The ECB’s chief economist, Philip Lane, has warned of a potential decline in economic output due to weakened loan volumes. If the latest bank lending data supports this dovish sentiment, it may fuel speculation that rates are approaching their peak.
As the ECB prepares to make its decision on interest rates, market participants are eagerly awaiting further guidance. The central bank’s next steps will shape the trajectory of interest rates in the euro zone.
