Economists expect rate-setters at the European Central Bank (ECB) to keep interest rates unchanged due to slow European growth.
As the meeting took place today, inflation in the eurozone stood at 5.3 percent, unchanged from last month but down from last year’s peak of more than 10 percent.
While the inflation rate is still well above the ECB’s two percent target, economists point to recent data that suggests the central banks’ nine consecutive rate hikes – which brought the key refinancing rate to 4.25 percent – The economy is starting to slow down.
Deutsche Bank analysts argued that data showing “increasing evidence of strong transmission” would prompt rate-setters to leave rates on hold.
Revisions to EU gross domestic product data between April and June showed the bloc grew by just 0.1 percent, down from a previous estimate of 0.3 percent. Additionally, the Eurozone wide Purchasing Managers’ Index for August came in at 46.7 after revisions, which is well below the 50-no-change mark and below the flash estimate of 47.0.
Both of these mean that growth will fall short of the ECB’s expectations and increase the risk of a recession at the end of the year.
But analysts said the ECB could not afford to interpret the pause as “an inflection point.” As a result the ECB will likely signal that future rate increases may occur if inflation fails to fall steadily below target.
“We expect the ECB to use uncertainty to bring more credibility to the message that it is prepared to raise rates further if necessary and remain high for longer,” he said.
Paul Hollingsworth, chief Europe economist at BNP Paribas, argued similarly, suggesting the ECB would give a “pregnant pause” as the growth outlook “is getting worse in June than the ECB expected”.
But Hollingsworth also highlighted that inflation is so high that the market cannot assume that the ECB has reached the end of its tightening cycle.
“While growth has clearly been weaker than expected, inflation has been more or less in line with the ECB’s June projections,” Hollingsworth said. That raises the possibility that inflation could remain high despite faltering growth in the bloc.
Not all economists agree that rates will be kept in place. Despite predictions of a recession later this year, Andrew Cunningham, chief Europe economist at Capital Economics, predicted a 25 basis point increase.
“We do not think this disappointing activity data will prevent the ECB from raising rates by 25bp next Thursday,” Cunningham said.