Economists are predicting that the European Central Bank (ECB) will raise interest rates one final time next month, despite recent signs of abating inflation pressure. According to a Bloomberg poll, the deposit rate is expected to increase from 3.75% to 4% in September. Additionally, respondents believe that officials will begin cutting borrowing costs in March, a month earlier than previously anticipated.
This comes as major central banks around the world consider the end of their rate-hiking campaigns. ECB President Christine Lagarde has stated that the upcoming meeting on September 14th will either result in a 10th consecutive rate increase or a pause. Recent research from the ECB suggests that underlying inflation, a closely watched metric, has likely reached its peak. Furthermore, a poll of consumers revealed that expectations for price growth in the eurozone have decreased, although they still remain above the 2% goal.
Despite these developments, analysts in the Bloomberg survey have raised their projections for inflation in 2023, as well as for core inflation this year and next. Additionally, a market measure of price gains is currently testing record highs. However, concerns about economic weakness are growing louder. Fabio Panetta, a member of the ECB’s executive board, has warned about the need for caution in calibrating monetary policy in order to achieve the inflation target without unnecessarily harming economic activity.
While the eurozone has managed to avoid a recession thus far and is expected to continue doing so, Germany, its largest member, experienced a winter downturn and stagnation in the second quarter. Economists predict that Germany will have another quarter of zero growth from July to September, and they still anticipate a 0.3% contraction in German output for this year. Furthermore, the outlook for 2024 has been downgraded from 1% to 0.8%. The German industry is facing ongoing weakness due to poor demand from China, worker shortages, tighter monetary policy, and the lingering effects of last year’s energy crisis.
The International Monetary Fund expects Germany to be the only country among the Group of Seven nations to experience a contraction this year. Germany’s economy ministry also stated that the expected recovery has not materialized in early summer. While there are signs of hope in terms of a cautious recovery in private consumption, services, and investment, the weak external demand, geopolitical uncertainties, high rates of price hikes, and the effects of monetary tightening are dampening a stronger economic recovery. Leading indicators such as new orders and the business climate do not point to a sustained economic revival in Germany in the coming months.
Investor confidence towards Germany is likely to deteriorate further, as indicated by the upcoming ZEW numbers.