FRANKFURT – The European Central Bank is set to raise interest rates to the highest level in more than 20 years on Thursday, even as the eurozone has slipped into a recession.
Analysts and investors are betting that politicians will deliver another 0.25 percentage point hike, taking the key deposit rate to 3.5%. The last time it was this high was in 2001.
With recent economic data suggesting that the ECB’s aggressive tightening is having the desired effect, the focus of President Christine Lagarde’s press conference will be on any indication of when rates might peak. Markets are currently expecting another quarter-point increase in July.
Lagarde She said the ECB is approaching its « cruising altitude » earlier this month and the global backdrop is also changing, with the US Federal Reserve expected to suspend its tightening cycle on Wednesday.
However, even after the ECB’s unprecedented campaign, which raised interest rates from -0.5% in July to 3.25% in May, headline inflation continues to exceed three times the price stability target of the central bank, far too high for the ECB to declare. victory.
Board member Isabel Schnabel said last week that the bank’s forecasts – to be updated on Thursday – imply that inflation will be above target for four full years before falling back below 2%.
The worst, increasingly, seems to be over: headline inflation has passed DESCEND faster than expected from a peak of 10.6% in October to 6.1% in May. Core inflation, which filters out volatile food and energy components and is seen as a more reliable guide to underlying inflation trends, began to ease in April as consumer inflation expectations fell significantly.
At the same time, the region’s economy looks sick. While the economy is set to sustain modest growth this quarter, official data has technically put the eurozone economy into a recession over the winter, and weak data for manufacturing orders and bank lending data point to further problems future.
“It is difficult to identify real growth prospects on the horizon,” warned UniCredit economist Erik Nielsen.
Usually, such a weak economy would be enough to keep prices in check. But record-low unemployment keeps domestic demand high even without the economy growing, and growing distrust of old economic models adds to skepticism about the belief that the inflation monster has been killed.
« There is no clear evidence that underlying inflation has peaked, » Lagarde warned last week.
The latest wage dynamics will keep the ECB on alert. Compensation per employee, historically the ECB’s preferred wage measure, increased by 5.2% year on year in the first quarter. This should be « of grave concern to the ECB, as it is expected to pick up again over the summer, » said Danske Bank economist Piet Haines Christiansen. Government energy subsidies, which have had the effect of boosting disposable income, also remain a concern for the bank.
Such concerns are likely to prevent Lagarde from giving clear guidance on when the ECB is likely to stop ramping, instead forcing her to emphasize the central bank’s reliance on incoming economic data.
« We believe the monetary policy statement will provide indications that policy rates are closer, though not yet, to a maximum, but the Governing Council will remain uncommitted, » Barclays economist Silvia Ardagna said in a note to the public. clients.
Any gaps in Lagarde’s communications could be filled by a potential change – or lack thereof – to the ECB’s new inflation forecasts for 2025.
“We expect ECB staff projections to still have inflation at 2.1% in 2025, which is unchanged from March,” Christiansen said, adding that this should maintain “a slightly aggressive tone to the communication.”
Pantheon Macroeconomics’ Claus Vistesen also pointed out that the end-of-horizon inflation forecast is used by the ECB to signal its policy bias. « As long as it stays above 2 percent, the Bank has a bias towards tightening and vice versa, » he said.
Vistesen believes that ECB staff forecasts will only be reduced to exactly 2% at the next round of ECB inflation forecasts in September, in line with current market expectations for a further hike in July before a pause.
Aside from interest rates, the ECB is also expected to confirm that it will end reinvestments from maturing bonds purchased under its old quantitative easing programme, the so-called APP. However, it is expected to reaffirm that the reinvestment of bonds purchased under the Pandemic Emergency Purchase Program will continue as planned.