European Central Bank (ECB) President, Christine Lagarde, left the financial world guessing during her recent speech at a seminar hosted by the European Economic and Financial Centre, refraining from revealing the ECB’s stance for the upcoming policy meeting scheduled for next Thursday. This reticence comes at a crucial juncture, with recent economic indicators signaling a slowdown in Eurozone economic activity, while inflationary pressures have somewhat eased. All eyes are now on the contentious deliberations among ECB policymakers as they weigh whether to halt their ongoing rate-hiking cycle.
Scheduled for September 14, the ECB policymakers must deliberate on whether the recent deceleration in the economy warrants a pause in their series of interest rate increases. Today’s news delivered a significant blow as the Eurozone’s August S&P composite PMI was revised downwards by -0.3 to 46.7, marking the steepest contraction in economic activity in almost three years. In July, at the preceding policy meeting, ECB President Lagarde had underscored the bank’s flexibility, indicating a willingness to either raise rates or maintain the status quo, highlighting the central bank’s reliance on economic data to guide its policy decisions.
Recent inflation figures from the Eurozone depict a mixed picture. In August, core consumer prices in the Eurozone eased to +5.3% year-on-year from +5.5% in July. Nevertheless, this figure remains well above the ECB’s medium-term price target of 2.0%. On the industrial side, Eurozone’s Producer Price Index (PPI) data revealed a more significant decline than anticipated. The July PPI dipped to -7.6% year-on-year from -3.4% year-on-year in June, marking the sharpest fall in 14 years. Adding complexity to the inflation outlook, a monthly consumer expectations survey from the ECB showed an unexpected uptick in July’s 3-year CPI consumer expectations, rising from 2.3% in June to 2.4%.
Market sentiment currently places the odds of a 25-basis-point rate hike by the ECB at the upcoming policy meeting at 25%. This is a notable drop from the previously estimated 60% chance of a rate hike, a shift triggered by the slowdown in core inflation within the Eurozone. ECB policymakers find themselves in a state of uncertainty, torn between continuing the rate-hiking trend or opting for a pause. Just last week, ECB Executive Board member Isabel Schnabel noted that while inflation remains elevated, growth prospects have deteriorated compared to June predictions. Additionally, ECB Governing Council member Mario Centeno highlighted on Monday the risk of raising interest rates too aggressively as the Eurozone economy adjusts to new financial conditions.
The twin challenges of stubborn inflationary pressures and a decelerating economy have raised concerns about stagflation. Bank J Safra Sarasin succinctly stated, “The Eurozone is trapped in stagflation, and a quick escape seems unlikely.” Morgan Stanley has altered its prediction, now expecting the ECB to pause in September due to recent Eurozone economic data falling short of expectations. They commented, “We revise our ECB forecast and anticipate a pause in September. We now project the terminal rate at 3.75%.” However, the more hawkish members of the ECB believe that the central bank might need to push rates higher before considering a pause. ECB Governing Council member Klaus-Dieter Wunsch emphasized on Saturday that it’s too early to discuss halting rate hikes, citing “very persistent” inflation as a factor.
Featured Image: Unsplash @ Mika Baumeister
Author Faith Yakubu 
