BENGALURU (Reuters) – The European Central Bank will keep interest rates unchanged on Sept. 14, according to a majority of economists polled by Reuters, but just under half expect another hike this year to bring down inflation.
With economic activity in the 20-member bloc slowing under the weight of the cumulative 425 basis point increases since July 2022, investors are now betting that the time has come for the central bank to break through its streak of nine consecutive increases.
ECB President Christine Lagarde raised the possibility of this when she said, offhandedly, at the ECB’s July press conference: “Do we have more ground to cover? At this stage I wouldn’t say so.”
But with inflation holding steady at 5.3% in August, well above the ECB’s 2% target, and underlying price pressures falling only slightly, policymakers stressed that another rate hike was likely.
While the majority of economists, 39 out of 69, in the Sept. 5-7 poll expected no change in the deposit rate on Thursday, 30 said the ECB’s Governing Council would raise it by a quarter of a percentage point to 4.00%.
If achieved, it would push the deposit rate to its highest level since its inception in 1999.
Faced with mixed data, economists were almost evenly divided on what will happen after the September meeting. Thirty-six out of 69 respondents expected the key interest rate to reach 3.75% at the end of the year, while 33 said 4.00%.
Interest rate futures are priced at around a 65% chance of pausing in September but more than a 50% chance of another rate hike by the end of the year.
“Officially, we expect the ECB to remain on the sidelines for the rest of the year, but right now, it’s almost like 50-50 coins,” said Jennifer Lee, chief economist at BMO Capital Markets, adding that there is not much clarity. Regarding inflation data since the last European Central Bank meeting.
“We were all eager to look for the next two inflation reports and always thought for sure that they would tell us what they (policymakers) would do in September, but both inflation reports were of no help.”
The ECB’s approach is based on incoming economic data, similar to the US Federal Reserve. But a stronger US economy compared to the Eurozone economy makes the Fed’s “higher for longer” slogan more likely.
This potential gap in interest rates leaves the euro vulnerable against the dollar, with the potential to add further upward pressure on prices by making imports more expensive.
Eurozone inflation, which has fallen significantly from a peak of 10.6% last October, is expected to average 5.6% this year and 2.7% in 2024, staying above the central bank’s inflation target until at least 2025.
Aside from volatile food and energy prices, core inflation is expected to average 5.1% and 2.8% this year and next, respectively, according to the survey.
The room for the European Central Bank to raise interest rates again is shrinking as the risk of recession increases. Major economies such as Germany – Europe’s largest economy – and the Netherlands have already fallen into recession, while most others have barely grown or contracted.
Growth in the euro area as a whole is expected to be flat this quarter and at 0.1% quarter-on-quarter in the following quarter. The survey showed that average growth will reach 0.9% in 2024.
The average probability of a recession within one year rose to 45% from 30% in last month’s poll, although that was based on a small sample of forecasts.
“The real economy is weaker than expected and inflation is falling as expected. Therefore, the ECB can remain in wait and watch mode,” said Luca Mizumo, head of macroeconomic analysis at Intesa Sanpaolo.
“If it’s just a weak spot, they’ll raise key interest rates again. If it’s instead the start of a deeper, more persistent slowdown, there won’t be any more hikes.”
(See other stories from the Reuters World Economic Poll:)
Prerana Bhatt reports; Polling by Vijayalakshmi Srinivasan, Anita Sunil, Purojit Arun and Prannoy Krishna; Edited by Ross Finley and Sharon Singleton
Our standards: Thomson Reuters Trust Principles.