Previous article
Can the ECB raise rates without causing turmoil?
Economy
ING expects the European Central Bank (ECB) to raise interest rates by 25 basis points at its meeting next week.
This would be the second hike this year, as policymakers weigh persistent energy-driven inflation against signs of economic resilience.
Carsten Brzeski, global head of macroeconomic research at ING, said the case for a rate hike has strengthened since July, when several ECB members were already advocating for such a move. Since then, the eurozone economy has demonstrated "almost unexpected resilience" to the Middle East war, partly due to Asian competitors losing orders to European companies after the closure of the Strait of Hormuz, and also due to long-planned fiscal stimulus measures, Brzeski noted. Headline inflation continues to rise and is projected to remain above 3% year-on-year until the end of the year, even though core and services inflation "currently provide no cause for panic." Given high oil prices and the growing risk of another gas price spike, Brzeski noted that it would be difficult for most ECB members not to see a case for another rate hike.
The new round of ECB staff forecasts is not expected to bring significant changes, although Brzeski believes growth and inflation forecasts should be slightly revised upwards—primarily due to earlier upward revisions to first-quarter growth and higher oil prices.
The question of whether the ECB will continue its rate hike cycle beyond September remains open. Markets have begun pricing in at least one more hike before the end of the year, while views within the ECB appear to be divided, with officials like Isabel Schnabel and Central Bank of Ireland Governor Gabriel Makhlouf signaling a willingness to tighten policy further.
Nevertheless, Brzeski noted that after next week's hike, the deposit rate, at 2.5%, will remain within the range the ECB itself considers neutral. A further hike, he said, would indicate that the ECB considers restrictive monetary policy necessary.
"But there's a big difference between an economy that has demonstrated resilience and an overheated economy that requires restrictive monetary policy," he added. "It remains difficult for us to imagine—against the backdrop of public finance concerns and soaring bond yields—that the ECB is truly prepared to add fuel to the fire." In other words, it's hard to imagine the ECB risking a recession to combat what remains a classic supply shock."
The recent spike in bond yields is also expected to be a topic of discussion next week. Brzeski noted that rising yields are, in a sense, doing the ECB's job by tightening financing conditions, but warned that excessive or uneven tightening across eurozone countries could create new problems.
Looking further out, he noted growing concerns about sovereign debt sustainability—especially in the lead-up to next year's French presidential elections—as well as early speculation about a possible successor to ECB President Christine Lagarde.