By Chris Dorrell
The European Central Bank (ECB) is almost certain to leave interest rates on hold later this week, but retain the option of hiking rates again if circumstances require.
After hiking rates again last month, the benchmark interest rates in the eurozone moved to their highest level in 22 years, standing between 4.25 per cent and 4.75 per cent.
Although the ECB lifted rates once more, minutes from the meeting showed the decision was a “close call”, with tactical considerations winning the day in the end.
In short, rate-setters were concerned that failing to lift rates again would have led markets to question its determination to bring inflation down to target.
Since that decision, PMI data has continued to be in contractionary territory while lending data shows a continued weakening in household and corporate borrowing.
The minutes revealed concerns over growth prospects across the bloc. “It was widely felt that, with hindsight, the June projections had been too optimistic about the strength of the economic recovery in 2023,” the minutes said.
ECB members have grown increasingly confident that the 10 rate hikes already undertaken have had an important impact on slowing the economy and bringing down inflation.
Inflation in the eurozone came in at 4.3 per cent in September, down from 5.2 per cent in August and the lowest level since October 2021.
According to the minutes, ECB modelling showed that interest rates in the region of 3.75-4.0 per cent would have brought inflation to target “so long as it was understood as being maintained for a sufficiently long duration”.
This seemed to confirm a statement from the previous decision, when the central bank said rates have “reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target”.
Given all this, economists were all but certain that interest rates would not be hoisted any higher. “Any policy action on the rates front looks unlikely next week,” analysts at BNP Paribas said.
However, many still felt that the ECB would not decisively call time on rate hikes just yet.
“Like in September, President Lagarde won’t say that rates have definitively peaked,” analysts at Deutsche Bank said. “Recent soft data imply the chances of a further hike are small, but uncertainties are high and optionality has value,” they continued.
Similarly analysts at BNP Paribas said a pause would not be a sign that the ECB has “won the battle against inflation”.
Nevertheless, pausing would provide further evidence that “the emphasis has shifted from ‘sufficiently high’ to ‘sufficiently long’.”
