The ECB moves to raise interest rates again amid inflation exceeding 3%
The European Central Bank is poised to raise interest rates for the second time next week, a move that appears all but certain, highlighting how prepared monetary policymakers are to take a third step later this year.
An anticipated 0.25 percentage point rate hike on Thursday is expected to cement the ECB’s position as the most hawkish central bank among the Group of Seven nations. With this move widely anticipated, the debate has already begun to shift toward whether a third increase is necessary.
Monetary policymakers, armed with new quarterly forecasts, are making their decision amid ongoing fighting in the Middle East and a resurgence in fuel costs, in a region that remains heavily dependent on energy imports.
Recent data showed eurozone inflation rose to 3.3 percent in August, the fastest pace in nearly three years and clearly above the 2 percent target.
Unlike the U.S. Federal Reserve, whose relatively reassuring stance on inflation may be tested by consumer price data expected next week, the ECB has been clear about the need for preemptive monetary tightening, a direction that could be supported by indicators of robust growth.
Nevertheless, recent eurozone inflation data provided some relief, as the so-called core measure slowed unexpectedly. However, policymakers do not appear willing to take risks, particularly after facing criticism for their delayed response to the cost-of-living shock in 2022.
The debate over a third rate hike may be very close. While Lithuanian central bank governor Giedrimas Šimkus suggested that the September increase might not be sufficient, German central bank president Joachim Nagel exercised caution regarding any signals.
Investors are largely pricing in a rate hike in December, although most economists currently believe Thursday’s increase will be the last. However, this consensus is beginning to shift, as analysts at JPMorgan, Societe Generale, and BNP Paribas revised their forecasts in recent days to anticipate such a move.
Experts at Bloomberg Economics stated: “With the Governing Council already widely signaling a rate hike this week, its hints regarding the next step will likely attract the most attention. Amid renewed volatility in oil markets and a sharp rise in gas prices, proponents of monetary tightening will undoubtedly push for another increase in December. However, tighter financial conditions and limited evidence of indirect effects from the energy shock pose significant obstacles for them.”
