ECB’s Rate Hike Door Still Ajar: More Surprises Await Beyond July Meeting

“ECB Considers Prolonged Interest Rate Hikes to Tackle Inflation, Reveals Meeting Minutes”
ECB's Rate Hike Door Still Ajar: More Surprises Await Beyond July Meeting

ECB May Continue Raising Interest Rates, Says Latest Meeting Minutes

The European Central Bank (ECB), under the leadership of President Christine Lagarde, may need to continue raising interest rates beyond this month in order to bring inflation back to target, according to the latest published minutes from the ECB’s last meeting. In June, the ECB raised its interest rates to their highest level in 22 years and stated that a ninth consecutive hike was highly likely in July. The ECB predicted that inflation would remain above its 2% target until the end of 2025. The minutes from the meeting revealed that rate increases could potentially continue at the ECB’s gathering in September.

The ECB emphasized the importance of communicating that monetary policy still had ground to cover in order to bring inflation back to target in a timely manner. It stated, “The view was held that the Governing Council could consider increasing interest rates beyond July if necessary.” The ECB also expressed concerns that market expectations at the time were insufficient to bring inflation back to the desired level. Market expectations priced in rate hikes in June and July, with a 20% probability of an additional 25 basis-point increase afterwards, followed by cuts in the first half of 2024.

Since the meeting, data has shown that the eurozone economy has been losing steam, and inflation in the area has fallen for a third consecutive month in June. However, core prices, particularly those for services, have been rising persistently and are not expected to ease anytime soon. This leaves the possibility open for a further rate hike by the ECB in September. Despite this, policymakers have agreed to adopt a “data-dependent approach” and “meeting-by-meeting optionality” when deciding on rates beyond July.

In June, the ECB raised borrowing costs by a quarter of a percentage point. However, the minutes revealed that there was initially a preference for raising the key ECB interest rates by 50 basis points. The ECB also made the decision to stop replacing bonds bought under its Asset Purchase Programme when they mature. However, one policymaker proposed deferring this decision to a later date in order to assess how the market would react to the repayment of half-a-trillion-euros worth of central bank loans.

In other news, eurozone industrial production in May rose less than anticipated, adding to signs that the manufacturing sector is struggling to regain momentum. Production shrank by 2.2% compared to the previous year, falling well short of analysts’ expectations. Manufacturing has been the biggest drag on growth as the eurozone battles to exit its downturn. Germany, Europe’s largest economy, experienced a surprise drop in industrial output in May.

Sources: Reuters, Bloomberg