Thomas Lyons 
The European Central Bank (ECB) is set to make a crucial decision on interest rates this week. Officials are waiting for two key economic reports, which are due to be released just one day before the meeting. The first report is the ECB’s quarterly survey of bank lending, which will offer an insight into how recent financial sector turmoil has affected credit growth. The second report is Eurostat’s release of April’s inflation reading. Analysts predict an uptick in the headline measure, but a slowdown for the underlying gauge that policymakers currently pay more attention to.
In Ireland, annual consumer prices rose 7.7% in March, down from 8.5% in February. There is a general consensus within the ECB’s governing council that the deposit rate, which is currently at 3%, must rise further to combat consumer-price gains that still far exceed the 2% target. However, unlike at previous meetings, where many officials voiced their preferences for adjusting borrowing costs beforehand, the remaining data points, along with Wednesday’s US Federal Reserve decision, leaves the choice between a 25- or 50 basis-point hike up in the air.
Bloomberg Economics’ chief European economist, Jamie Rush, has said that the eurozone was resilient through the winter, but not so resilient as to raise alarm among members of the governing council. “With inflation and bank-lending data landing before the ECB meeting, there’s still a narrow path to a 50 basis-point hike,” he said. Investors believe that the lesser move is more likely, assigning only a 12% chance to the alternative. Gilles Moec, chief economist at Axa, believes that a quarter-point is the base case. However, a big shock in Tuesday’s data could yet tilt the governing council toward doing more. “If we get an upside surprise in inflation, plus a benign bank lending survey, then they might go for 50,” he said. “It’s very rare that we have a cocktail of data that gives us a clean picture.”
Last week’s numbers pointed to an uneven trajectory for the 20 members of the eurozone. While it avoided an energy-induced winter recession, France and Italy returned to growth, and Spain gathered momentum. Germany only narrowly dodged a downturn with first-quarter stagnation. The ECB’s governing council must take into account all of these factors before making a decision on interest rates.
