ECB fans talk of September pause after raising rates to 23-year high

FRANKFURT – The European Central Bank raised interest rates for the ninth time in a row on Thursday, but raised the possibility of a September pause as inflation pressures show tentative signs of easing and recession concerns mount.

Fighting a historic rise in prices, the ECB it has now increased borrowing costs by a combined 425 basis points since last July, concerned that price growth could be perpetuated by both rising costs and wages in an exceptionally tight labor market.

With the 25 basis points of Thursday movehe ECBThe deposit rate is located at 3.75 percent, its highlowest level since 2000, even before euro notes and coins were in circulation. The main refinancing rate was set at 4.25 percent.

READ: ECB raises rates to 23-year highs; keeps options open for September

ECB President Christine Lagarde abandoned her practice of guiding markets by next decision and said what would come next was at stake, even if the central bank was determined to “break the back” of inflation.

She had responded to most of the questions in a press conference by saying that all options were still on the table, but sent the euro crashing with a subdued flourish near the end.

“Do we have more ground to cover? At this moment I would not say that, ”Lagarde said, almost without being asked, while he stressed that the ECB‘s decisions would depend on the data.

“There is the possibility of taking a walk (next time). There is the possibility of a pause. It’s a decisive maybe.” Lagarde said, adding that policymakers were “open mind” and unified.

Investec’s Ryan Djajasaputra said Lagarde’s tone hinted at a pause. “Our main takeaway from today’s press conference was that it reinforced our existing view that this is the peak in rates“.

Two sources with direct knowledge of the discussion also described a change of mood in the Governing Council, with more lawmakers than before now concerned about a weakening economy. after to year in which the concern for inflation predominated.

Some lawmakers currently favor a September pause, hoping the euro zone heads into recession, while others would prefer to raise borrowing costs again.

A ECB The spokesman declined to comment.

He ECBThe previous policy statement of rates would be set at “sufficiently restrictive levels for as long as necessary” but removed a reference to the rates having to be “brought up” to a level that would bring inflation down fast enough to its 2 percent target.

Lagarde explained that the adjustment “was not random or irrelevant.”

Inflation, recession?

The problem is that inflation is coming down slowly and could take until 2025 to fall back to 2 percent, as an initially energy-led price increase has trickled into the broader economy through wide margins and is rising. the cost of services.

READ: Inflation in the euro zone falls again in June due to the collapse in energy prices

While headline inflation has halved since October, core price growth is hovering around historic levels. highit may even have sped up this month.

Lagarde said the risks of so-called “second round” effects had not worsened since last month.

But record unemployment has raised fears that wages will rise as workers seek to recoup real income lost to inflation, which is why many investors and analysts expected the ECB go up again in September pending fall wage data.

“Because we expect a significant drop in inflation and a recession in the second half of the year, we still do not forecast a rate hike in September. On the other hand, we doubt the market view that the ECB cut to rates already in 2024,” said Joerg Kraemer, chief economist at Commerzbank.

The euro fell as Lagarde spoke and briefly dipped below $1.10, having risen 0.5 percent to hit $1.1149 earlier.

Markets had fully priced in another rate hike just weeks ago, but now few see one. move in September and markets are only quoting 17 basis points higher for the rest of the year. year.

“The bar for another hike in September now hinges on upside surprises in inflation numbers, at a time when strong disinflationary forces are at play, so the default position is to hold rates constant over a sustained period,” said Neil Mehta, portfolio manager at RBC BlueBay Asset Management.

However, further tightening would be consistent with feedback from policymakers, including ECB board member Isabel Schnabel who lifting rates too much would be less expensive than not enough.

On Wednesday, the US Federal Reserve raised borrowing costs and kept the door open for more rate hikes, though Fed Chairman Jerome Powell gave few clues about the September meeting.

Business, investor and consumer confidence indicators and bank lending surveys point to continued deterioration after the euro area bordered on a recession last winter.

And with manufacturing in deep recession and the previously resilient services sector showing signs of weakening despite what is likely to be a bumper summer holiday season, it’s hard to see where a rebound would come from.

Such weakness, exacerbated by a loss of purchasing power after inflation eroded real incomes, it could push inflation down faster than some expect, leaving less work for the ECB.

“We know we are getting close,” Lagarde said, referring to the end of the ECBThe rate hike race.

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