European Central Bank (ECB) President Lagarde did not indicate what the ECB would do at next Thursday’s policy meeting when she spoke Monday at a seminar organized by the European Economic and Financial Centre. Recent economic news is showing a slowdown in Eurozone economic activity, while price pressures have eased slightly, pointing to a contentious meeting as ECB policymakers decide on whether to pause its rate-hiking cycle.
ECB policymakers meeting on September 14 must assess if a recent slowdown of the economy is sufficient to warrant a pause in its rate hikes. News today showed the Eurozone Aug S&P composite PMI was revised downward by -0.3 to 46.7 from the previously reported 47.0, the steepest pace of contraction in 2-3/4 years. At its previous policy meeting in July, ECB President Lagarde said the central bank could hike or hold as it increases its focus on economic data to guide policy actions.
Recent price data from the Eurozone paints a mixed picture of inflation. Eurozone core consumer prices in August eased to +5.3% y/y from +5.5% in July. However, that is still over twice the ECB’s medium-term price target of 2.0%. Prices on the factory side in the Eurozone eased more than expected after today’s news showed the Eurozone July PPI eased to -7.6% y/y from -3.4% y/y in June, the sharpest decline in 14 years. Further complicating the price outlook was today’s monthly consumer expectations survey from the ECB that showed the July 3-year CPI consumer expectations unexpectedly rose to 2.4% from 2.3% in June.
Money markets are placing the odds of the ECB raising rates by 25 bp at next week’s policy meeting at 25%. That compares to as much as a 60% chance of a rate hike before economic data showed core inflation in the Eurozone slowed. ECB policymakers appear uncertain on whether to keep hiking rates or pause. Last week, ECB Executive Board member Schnabel said that while inflation is still high, growth prospects are worse than officials predicted in June. Also, ECB Governing Council member Centeno said Monday that there is a risk of raising interest rates too far as the Eurozone economy adjusts to new financial conditions.
The prospects of sticky price pressures and slowing growth have also sparked concerns about stagflation. Bank J Safra Sarasin said, “The Eurozone is stuck in stagflation, and we’re not going to come out of it any time soon.” Morgan Stanley predicts that the ECB will not raise interest rates any further due to recent weaker-than-expected Eurozone economic news and said, “We change our ECB call and expect a pause in September. We now see the terminal rate at 3.75%.” However, the hawks on the ECB believe the central bank may have to raise rates further before coming to a pause. ECB Governing Council member Wunsch said Saturday that It’s too soon to talk about stopping rate hikes due to “very persistent” inflation.
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
