Dear clients,
According to eight sources with direct knowledge of the discussions, European Central Bank policymakers are increasingly concerned about the deteriorating growth prospects for the economy and, while the discussion remains open, the idea of holding off on rate hikes is gaining momentum.
The ECB has raised rates at each of its last nine meetings in a bid to rein in price growth, most recently on July 27 when it left open the choice of its next meeting in September, with policymakers divided between a pause and further tightening.
Talks with eight policymakers in Europe and on the sidelines of the US Federal Reserve’s symposium in Jackson Hole suggest proponents of a „pause“ are growing stronger after key economic indicators over the past six weeks have come in below expectations, suggesting a recession has become likely.
Several sources said the odds were evenly split between a rate hike and a pause, while some said a pause was more likely. But none of the sources said they thought a rate hike was the most likely outcome, even if that was their preference.
That’s markedly different from six weeks ago, when a rate hike in September was still considered the most likely outcome. However, all sources agreed that even in the event of a pause, the ECB would have to make it clear that its work is not yet done and that further policy tightening may be needed.
They said it could take several months, possibly until early 2024, to be sure that eurozone inflation, now at 5.3%, is moving towards the 2% target.
The sources also agreed that the discussion remains open and nothing will be decided until the next inflation figure on August 31 and the ECB’s new economic forecasts. The next ECB meeting will be held on September 14.
Markets are currently split between the chances of a rate hike in September and a pause, but expect the ECB to still go for a final rate hike of 25 basis points to 4% at some point later this year.
