This Thursday 27th July, the European Central Bank, ECB, is expected to hit the rate hike button once again, but beyond the end of July, markets appear unsure of what is going to happen next. Currently EuroZone interest rates stand at 3.5% the highest in the last 22 years, having risen by 400 basis points in the last year. However, many experts suggest that interest rates have come close to topping out as headline inflation begins to cool along with a weakening economy.
What many analysts and traders are saying is that the ECB has always offered fairly exact guidance as to what will happen at their next rate meeting. However, this time around guidance for the September meeting is somewhat opaque so the markets are ruminating as to what is going to happen. As far as this Thursday goes, economists suggest that there will be a 25-basis point rate increase to 3.75% as non-core or headline inflation remains just high enough to justify a move of a ¼%, and anything higher will be a surprise.
A consensus amongst various experts and analysts suggests that a rate hike in September is no longer a certainty and expects the ECB president Christine Lagarde to stress uncertainty in regard to further tightening of monetary policy. However, there is a feeling that after July there may be one more hike to 4% where EuroZone rates will have reached their zenith, though as to when rates begin to fall, we may have to wait and see. Some experts are predicting rates to be circa 2.4% by the end of 2024 with rates beginning to decline in Q2. Indeed, recent bank lending data would appear to suggest that the upward surge in the cost of borrowing (the steepest in the ECB’s history), shows that loan volumes have come down sharply which may facilitate a decline in economic output, which is further fuelling speculation that rates are finally peaking.
Finally, the villains of the piece, headline inflation and core inflation (core inflation represents the change in the cost of services and goods but does not include those figures from the energy and food sectors). Whilst headline inflation fell across the Eurozone for the third straight month in June, core inflation (which is considered a better guide on the underlying trend) only fell slightly from 6.9% to 6.8%, which is not what the policy makers within the ECB wish to see. There will probably be little comment from the ECB until new economic projections come out in September.