BRUSSELS: The European Central Bank (ECB) is set to raise borrowing costs for the second time since the Iran war sent energy prices soaring, with inflation locked well above target and the region’s economy proving surprisingly robust.
The deposit rate will be lifted by a quarter-point to 2.5%, according to all but one analyst in a Bloomberg poll.
New quarterly forecasts will bolster the case for action by pointing to stronger inflation pressure alongside faster growth in the 21-nation eurozone.
Policymakers are battling consumer-price gains that breached 3% last month, an almost three-year high that’s unlikely to recede much in the months ahead.
In a break from peers including the Federal Reserve and the Bank of England, the ECB increased rates in June, and there’s little disagreement over another move.
What happens next is far less certain.
Markets see two or more additional hikes, while economists are sceptical. ECB officials are divided too.
Some say rates may need to rise further after this month, but others urge caution in the absence of second-round inflation effects and lingering risks from the Middle East and US trade.
“The ECB will obviously hike this week,” said Jari Stehn, chief European economist at Goldman Sachs.
“But huge uncertainty about the outlook and some signs of a split in the Governing Council mean it’s likely to leave the rate outlook completely open.”
Officials have widely telegraphed September’s rate increase, which will cement the ECB’s status as the most hawkish central bank within the Group of Seven.
But divisions have emerged over what will follow.
Lithuania’s Gediminas Simkus has said hiking to 2.5% won’t be enough to return inflation to 2%, citing firmer growth, among other factors.
Executive board member Piero Cipollone, meanwhile, has warned the ECB shouldn’t tighten excessively, to avoid economic harm.
“Amid the renewed volatility in oil markets and surging gas prices, the hawks will undoubtedly push for another increase in December.
“However, the tightening of financial conditions and limited signs of indirect effects from the energy shock create significant hurdles for them.”
That’s partly because 2.5% is widely seen as the upper limit of a neutral range beyond which activity becomes restrained.
Not everyone agrees, though. Ireland’s Gabriel Makhlouf argues restrictive territory would start only above 2.75%.
Bundesbank President Joachim Nagel has said officials must also consider the recent rise in global bond yields, which “complicates the situation”, even as tighter financial conditions help the ECB curb inflation.
New projections will be crucial and the path for rates beyond.
The ECB is also expected to publish alternative scenarios again, like it did in March and June. In terms of the baseline, analysts foresee an upward revision to next year’s inflation forecast, from 2.3% in June.
For 2026, they anticipate an unchanged projection of 3%, and stronger economic expansion.
“Unless the 2028 forecast is below target, especially on core and ex-energy inflation, it will validate the total of a bit more than three hikes that are factored into the projections,” JPMorgan economist Greg Fuzesi said in a note.
Officials must, however, keep in mind that their estimates are likely to already be somewhat outdated.
With a cut-off date in August, the outlook probably won’t reflect the latest surge in bond yields or loftier energy prices. — Bloomberg
