Nadia Gharbi, Senior Economist, at Pictet Wealth Management.
At the last ECB meeting in June, the ECB raised interest rates by 25bp, while signalling that it has still “more ground to cover”. The ECB committed to maintaining a tight policy stance for as long as necessary in order to achieve “a timely return of inflation to the 2% medium-term target.”
ECB President Lagarde said that “the second phase of the inflation process is now starting to become stronger”, largely due to a “sustained wage catch-up process”. A tight labour market is slowing down the disinflation process. As such, the recent weakening in leading activity indicators is unlikely to stop the ECB. Last but not least, the ECB believes that demand needs to be damped for longer “so that firms cannot continue to display the pricing behaviour we have recently seen”.
In all, the ECB looks all but certain to hike the deposit rate by 25bps to 3.75% on 27 July. This should not surprise market as it has been largely telegraphed. The real debate is whether the ECB will hike again in September (and beyond). Several hawkish members have been more cautious about what might happen after July. The Dutch central bank head, Klaas Knot, told Bloomberg: “For July I think it is a necessity, for anything beyond July it would at most be a possibility but by no means a certainty”.
Christine Lagarde will probably be more nuanced about future meetings, emphasizing the ECB’s data dependence mode and the importance of the staff projections to be published in September. Data (see below some important data to watch) between now and the ECB meeting (on 14 September) will shift the balance one way or the other in terms of a hike to 4% in September. On the one hand, there are increasing signs that monetary tightening is transmitting fast in the real economy. On the other hand, core inflation may not lose sufficient momentum to justify a pause in September.
Thus, a September hike is not a done deal. Either way, we believe that a September hike would be the last one in this cycle, bringing the deposit rate to 4%. Crucially, the ECB will then focus on the necessity to keep rates at these levels for longer, and we expect no rate cut before H2 2024.
