What to expect from the ECB’s upcoming Monetary Policy Meeting

Coming up this week the European Central Bank is due to meet again to set the course of interest rates for the next month. As economic activity in the Eurozone has slowed due to cumulative rate hikes of 425 basis points since July last year, many economists believe it is time for the central bank to put an end to its trend of nine consecutive rate increases.

Similar to other central banks and, perhaps most crucially, the US Federal Reserve, the ECB develops a strategy that depends on the interpretation of incoming economic data before making decisions on rates.

With this in mind, along with the other considerations that the ECB must weigh when making its decision, it is crucial to evaluate the increasing disparity in interest rates between the euro and the dollar. This divergence exposes the euro to potential vulnerabilities, and the concern lies in the possibility that such a disparity may lead to increased upward pressure on prices, primarily driven by the elevated cost of imports.

The ECB has continued to find it difficult to keep pace with the Fed, since the Fed's present preference for keeping higher interest rates for longer periods is more doable owing to the strong status of the US economy when compared to that of the Eurozone.

Below we’ll take a look at some of the latest data and how it may impact the decision for the ECB.

July’s Meeting

All three major ECB interest rates were increased by 25 basis points by the Governing Council at the previous meeting in July. They came to 4.25% for the main refinancing operations, 4.50% for the marginal loan facility, and 3.75% for the deposit facility.

According to the minutes from the meeting, policymakers upheld the potential for a rate hike in September when they increased interest rates in July. However, some members at the time indicated that this might not be required anymore if new data contradicts the need for it.

The ECB board, like many of its international peers, is attempting to pull off the balancing act of bringing inflation back to the target 2% while not plunging the Eurozone economies into a deep recession. Even though GDP has been declining, some in attendance at the meeting noted that underlying inflation might be anticipated to stay high for a considerable amount of time.

However, some policymakers argued that a September rate increase was unnecessary because monetary policy had already been sufficiently tightened to reduce inflation in the coming years. Lags in policy can often take up to two years to unfold, and the board may follow the lead of some of its peers and pause this week to see what happens.

Decline in inflation starting to slow

Last month’s inflation figures weren’t where the central bank would like to have seen them, but they’ve come a long way since the high of 10.6% reached in November last year.

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Preliminary estimates recently revealed that in August, the annual inflation rate stayed unchanged at 5.3%, much higher than the ECB’s target 2% and above the market consensus of 5.1%. Meanwhile, the core inflation rate, an important underlying indicator that excludes food and energy costs, dropped to 5.3% from July's 5.5% as predicted.

The final report for August is due on the 19th of September where it’s expected the original figure will remain unchanged. Following that, the new Flash reports for annual and monthly headline and core inflation for September are expected to be released on the 29th September.

Labour market remains uncomfortably tight

The employment market in the Eurozone appears to be more competitive than ever at the moment, and is currently one of the most crucial aspects of the economy to monitor.

In line with market expectations, the seasonally adjusted unemployment rate remained at a historic low of 6.4% in July. Down from 6.7% a year earlier. However, the number of individuals without jobs rose by 73,000 from the previous month, reaching 10.944 million.

The ECB is concerned that the constrained labor market will keep inflation above target for longer, as firms in the eurozone view labor as one of the greatest supply-side obstacles to growing their businesses. New data for August won't be due until the 2nd of October.

GDP slowing but still in growth mode for now

According to the most recent figures released last week, economic activity in the eurozone barely inched forwards in the second quarter of the year. These results, which were worse than projected, were driven by the poor performance of exports and the stagnation in domestic spending.

According to the most recent data from Morgan Stanley (NYSE:MS) , the most recent economic data indicate that the ECB won't increase interest rates further. Economists at the investment bank have suggested that data this week indicating a slowdown in services inflation, along with warning signals of a worsening economy, is likely to tip the scales in favour of a halt this month. Previously, they anticipated a further rise in September, but they now anticipate that the ninth straight rate hike in July was the last one.

Written By: ActivTrades