While it was considered certain that the European Central Bank (ECB) would increase the policy rate by 25 basis points at its July meeting, the predictions that this might be the last interest rate hike by the Bank gained strength. Despite the ongoing inflationary pressures in the Euro Zone, the decline in Purchasing Managers’ Index data led to the projections of the last rate hike this month.
While the “stubborn” course of core inflation in the Euro Zone narrows the policy area of the ECB, the messages of policy makers who are stuck in a recession and inflation dilemma are important for the Bank’s future policy.
Despite the predictions that the Bank would raise interest rates by 50 basis points in total until the end of the year, expectations that the last rate hike might be in July gained strength.
Despite the ongoing inflationary pressures in the Euro Zone, the decline in Purchasing Managers’ Index (PMI) data also highlighted the projections for the last rate hike this month.
Elwin de Groot, Rabobank ECB and Euro Area Head of Macro Strategy, said in a statement that there will be no change in the ECB’s policy and that the meeting may contain very little new information.
“Communication problem may also continue”
Expressing that the ECB Governing Council will do its best to avoid making any promises to raise interest rates or keep interest rates stable in September, while waiting for important data and new projections, Groot stated that the communication problem between members may continue at this meeting.
Groot said the ECB will work to move from “higher rates on interest rates” to “longer hold on interest” messages in its communications.
Expressing that the ECB may adopt a new form of verbal guidance to try to manage medium-term expectations, Groot noted that the effects of this verbal guidance may be limited.
“The ECB may not raise interest rates again, interest rates may have peaked”
Elwin de Groot stated that the ECB successfully delivered the message that it will increase by 25 basis points.
Noting that the 25 basis point increase was priced strongly in the markets, Groot said that after the increase in July, the ECB may not raise interest rates again and that interest rates may have peaked.
Noting that in case of any negativity regarding inflation or doubts regarding policy transfer, interest rate hikes may continue after the summer season, Groot said:
“The ECB’s internal indecision is justifiable given the current background, but this can present additional challenges when it comes to communication strategy. There are also time inconsistencies in the ECB’s communication. While the ECB Governing Council wants to keep its options open in the near term, it is likely to be mid-term. “In the long run, it will want to send a much stronger message. It can be difficult to reconcile these two goals.”
“ECB will not cut interest rates in 2024”
Commerzbank Senior Economist Marco Wagner emphasized that Europe’s economic concerns are increasingly coming to the fore.
Expressing that the economic outlook could be discussed intensively at the ECB’s July meeting, Wagner said that it is likely that the ECB will revise its overly optimistic economic growth forecast downwards in September.
“In this context, the ECB will probably end the rate hikes this week, even if the market still priced in a significant possibility for a September rate hike. The ECB will not cut interest rates in 2024. Because the Eurozone lags behind the US in terms of the decline in inflation,” Wagner said. made its assessment.
“PMI data increased the possibility of no change in interest rates in September”
Berenberg Economist Salomon Fiedler, on the other hand, said that there is a 60 percent probability that the ECB will raise interest rates by 25 basis points in September, but the decline in the Euro Area PMI data increases the probability that the Bank will not make any changes in interest rates in September.
“The ECB will not offer clear verbal guidance at its July meeting on whether it will likely raise interest rates in September. Instead, it will insist on a data-driven wait-and-see approach,” Fiedler said.