The ECB is widely expected to leave interest rates unchanged today, while reiterating that it remains well positioned to navigate the uncertainty caused by the war and that it will continue to follow a data-dependent and meeting-by-meeting approach. The central bank will not release the macroeconomic projections at this meeting, so the market focus will be mainly on President Lagarde’s press conference for clues on whether policymakers are preparing for another rate hike in September.
The case for a pause has strengthened over recent weeks. Eurozone inflation moderated in June, services inflation surprised to the downside, wage growth continued to soften, and inflation expectations remained relatively well anchored. Business surveys have also pointed to sluggish economic activity, suggesting the ECB can afford to wait for additional evidence before tightening policy further.
Recent comments from ECB members have struck a measured tone, acknowledging that higher oil prices represent an upside risk to inflation while adding that the feared second-round effects through wages have yet to materialize. Several members have highlighted the absence of sustained wage pressures, reinforcing the argument for more patience.
Unfortunately, the upside risks for inflation and downside risks for growth have increased again recently amid the renewed US-Iran conflict. Oil prices have climbed back above $90 per barrel with no top in sight amid disruptions in the Strait of Hormuz, and now also the Red Sea. These risks are likely to keep the ECB’s tightening bias intact.
As a result, traders expect today’s decision to deliver a “hawkish” pause with President Lagarde reiterating that future decisions will continue to depend on incoming data, while keeping the door open to another rate increase if inflation risks intensify. The most likely scenario is that we get the usual post-meeting media “leak”signalling a rate hike in September if inflation data were to surprise to the upside.
The market is pricing in a total of 47 bps of tightening by year-end (roughly two rate hikes) and a 73% chance of an increase at the next meeting in September. Given this backdrop, it’s going to be hard for Lagarde to out-hawk the market. Overall, the decision is likely to be a non-event and only a pushback against the market pricing or a pledge to tighten more than expected would trigger significant moves in the markets.
This article was written by Giuseppe Dellamotta at investinglive.com.
