Economists see the European Central Bank lifting interest rates one last time to tame inflation — they’re just not sure it will happen next week.
A Bloomberg survey shows an almost even split between those anticipating a 10th consecutive hike on Thursday and those anticipating a “hawkish pause” before the deposit rate reaches a record 4% in October.
Respondents see the ECB confirming by December that borrowing costs are at the peak. They’re penciling in a first rate cut of three in 2024 for March — well before ECB officials are themselves suggesting reductions may start.
The results mirror the diverging views on the Governing Council as the ECB’s most forceful bout of monetary tightening draws to a close. Opinions range from Slovakia’s Peter Kazimir, who’d like a final rate increase this month to be assured that inflation will indeed return to the 2% target — to Portugal’s Mario Centeno, who frets about the consequences of doing too much as Europe’s economy wobbles.
Policymakers may also have an eye on the Federal Reserve, which meets less than a day before the ECB’s announcement and is expected to leave borrowing costs unchanged.
“The ECB will have to balance between a dovish hike or a hawkish pause — not an easy one,” said Carsten Brzeski, ING’s head of macro. “A pause of the hiking cycle would be the best to do. However, as a pause currently runs a high risk of turning into a full stop, ECB hawks will probably push for one final hike.”
Economists’ expectations aren’t overly dissimilar to financial-market bets. Traders price a 40% chance of a move next week and see a 70% probability of one materializing by year-end.
What Bloomberg Economics Says…
“While our base case is for a hike, it’s not a strong-conviction call. The economic slowdown, a turn in the path of underlying inflation, a probable end to the hiking cycle in the US and fears over China’s resilience could yet persuade the Governing Council to pause and take stock.”
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Whatever the decision, survey respondents say President Christine Lagarde and her colleagues will settle on the appropriate monetary stance, with roughly four-fifths saying the ECB will neither stop raising rates too early nor tighten too far.
“The biggest challenge will be to offer guidance in an environment where they’ve pretty much said that no guidance can, or will be offered,” said Claus Vistesen, chief euro-zone economist at Pantheon Macroeconomics.
Updated economic projections may help. In June, they showed inflation averaging 2.2% in 2025 — just exceeding the ECB’s goal — with a gauge excluding volatile items such as food and energy higher still.
Analysts are torn on whether September will see that outlook confirmed, or hint at an improvement. They do expect it to reveal weaker economic expansion this year and next.
“The ECB is more concerned about inflation not returning to target in a timely manner than the economy falling into recession,” said Piet Christiansen, chief strategist at Danske Bank. “I don’t think the ECB will pause given that the rate path is the primary policy tool.”
There may be scope for compromise, however, if a less aggressive stance on rates is complemented by a faster shrinking of the ECB’s stash of bonds, accumulated during past stimulus drives.
More than half of respondents say there’s less need to continue rolling over maturing debt under the ECB’s pandemic asset-purchase program once rate increases end. Policymakers had touted flexible reinvestments as a first line of defense against market turmoil as the ECB tightened. They’re currently set to run through end-2024.
“The speed of quantitative tightening will accelerate in the future,” said Dennis Shen, senior director at Scope, who’s among the almost two-fifths of respondents expecting an early end to reinvestments. That share is nearly double what it was before July’s meeting.
The proportion of those anticipating that the ECB will step up the reduction of its older bond portfolio by supplementing roll-offs with sales rose to 43% from 37%. The vast majority sees roll-offs continuing even when interest rates begin to fall.
Whatever haggling takes place over QT, Lagarde’s immediate focus will remain on rates.
“Communication is likely to prove materially challenging,” said Andrzej Szczepaniak, an economist at Nomura. “Painting of a picture of unity will likely prove very difficult while there’s increasing public disagreement among Governing Council members over whether the ECB should raise rates any further, as well as over how long to keep rates set at restrictive levels.
Following are the latest moves of the key assets: