ECB to pause in September, according to slim majority of ANBLEs poll

ECB to pause in September, according to slim majority of ANBLEs poll

European Central Bank Pauses Rate-Hiking Campaign, but Inflation Remains Sticky

European Central Bank

The European Central Bank (ECB) is expected to pause its more than year-long rate-hiking campaign in September, according to a narrow majority of experts polled by ANBLE. However, a further rise in rates is still on the cards by year-end, driven by persistently high inflation rates.

Since July 2022, the ECB has implemented nine consecutive rate hikes. However, bank President Christine Lagarde hinted at a possible pause during a news conference following last month’s 25 basis point increase. Lagarde stated, “Do we have more ground to cover? At this point in time, I wouldn’t say so.”

Lagarde also emphasized the importance of incoming data in determining future decisions, suggesting that both a rate hike and a pause are a “decisive maybe” for the September meeting. In the poll, 53% of the 70 experts predicted no move in rates at the September 14 meeting, compared to 47% in the previous month’s poll. This would align with market expectations, keeping the ECB’s deposit rate at 3.75%.

However, the poll reveals that 53% of experts anticipate a deposit rate rise to 4.00% sometime this year, with 33 experts expecting it in September, and four in either October or December. While markets currently predict a 60% chance of a rate pause in September, predictions for the year-end are divided, with just over a 50% probability of a 4.00 deposit rate by then.

“Our baseline sees the ECB on hold for an extended period. However, inflation setbacks could still force a rate hike later this year,” said Bas van Geffen, senior macro strategist at Rabobank. “With the ECB remaining data-dependent, September and October pose the biggest risks for another rate hike should data fail to give the (Governing) Council the confidence that inflation is gradually converging to target.”

Sticky Inflation Challenges ECB

Flash data from last week revealed that the core euro zone inflation, which excludes volatile food and energy prices, remained at 5.5% in July, while headline inflation, targeted by the ECB at 2%, only slightly decreased to 5.3%. The poll indicates that core inflation is projected to average 5.0% this year and 2.9% in 2024, surpassing the 2.5% headline forecast for next year.

Furthermore, the poll shows that overall inflation is not expected to reach the 2.0% target until at least 2025. Additionally, more than 90% of the experts surveyed believe there will be no rate cuts before the second quarter of 2024.

The consensus view suggests that if the ECB follows through with one more rate hike, it would mark the highest deposit rate since the introduction of the euro in 1999, totaling a combined 450 basis points of hikes in the current cycle. The surge in price pressures, initially driven by soaring energy costs, has permeated the broader economy and continues to weigh on consumer demand.

Germany, as the European Union’s largest economy, has been particularly affected by spillovers from the war in Ukraine and high energy prices, posing challenges for the entire euro zone economy. Despite narrowly avoiding a recession, the future prospects for the euro zone economy remain bleak.

According to the survey, the euro zone economy is expected to grow by only 0.1% and 0.2% in the current and next quarter, respectively, with an average growth rate of 0.9% in 2024. Sluggish economic growth played a significant role in the ECB signaling an end to its rate-hiking cycle, deviating from its previous stance of having “more ground to cover.”

“We expect the economy to broadly stagnate over the next few quarters as the euro area will face several headwinds from high uncertainty, the lagged impact of the ECB tightening cycle… and less fiscal support,” said Michael Kirker, European ANBLE at Deutsche Bank.

In conclusion, the European Central Bank is likely to pause its rate-hiking campaign in September, as indicated by experts polled by ANBLE. However, the persistently high inflation rates present challenges for the ECB’s decision-making. The future path of interest rates will depend on incoming data, particularly for the September meeting. With inflation remaining sticky, the ECB faces the dilemma of balancing economic growth and price stability in the euro zone economy.