The European Central Bank (ECB) is expected to raise borrowing costs again in July, according to its chief economist, Philip Lane. However, Lane stated that it is too early to determine if further rate hikes will be necessary after that. He explained that there are still several data points to consider before making a decision in September. The debate among ECB officials regarding when to pause the rate hikes is intensifying, with some suggesting that a pause could occur after July’s increase. However, others argue that more tightening may be required in the fall due to persistent core inflation concerns.
Italian inflation figures for June, which slowed to 6.7% from 8% in May, did not provide strong evidence for the ECB to halt rate hikes next month, analysts noted. Eurozone-wide inflation figures are expected to be released on Friday, which will provide further insight into the overall inflationary trend. ECB Vice President Luis de Guindos stated that while another interest rate increase in July is almost certain, the outcome of the subsequent meeting remains uncertain and will depend on economic data received in the meantime. De Guindos also highlighted the possibility of underlying inflation pressures being more stubborn than anticipated, particularly due to higher service costs during the summer tourist season.
ECB President Christine Lagarde recently stated that it is unlikely the ECB will be able to confidently declare that interest rates have reached their peak anytime soon. She referred to a “second phase of the inflation process” where workers are seeking wage increases to recover lost income. Politicians have also entered the discussion, with Italian Prime Minister Giorgia Meloni warning that tightening measures could do more harm than good. Mario Centeno, Portugal’s representative at the ECB, expressed concerns about excessive tightening and emphasized the need to avoid negatively impacting the economy.
In terms of inflation, headline figures in the eurozone are expected to decrease, while the underlying measure is predicted to rise slightly. Many ECB officials, who recently gathered in Sintra, Portugal, have focused on the persistent inflation risks. Boris Vujcic from Croatia suggested that ongoing price pressures may eliminate the possibility of a rate hike pause in September. Pierre Wunsch from Belgium stated that a pause can only occur if the core inflation gauge declines for three consecutive months, which analysts believe is unlikely to happen.
There are already indications of weakness in eurozone growth, with activity surveys from June suggesting a potential stall. Germany, the largest economy in the eurozone, is struggling to recover from a winter recession. These factors contribute to the ongoing deliberations within the ECB regarding the appropriate course of action.