ECB to hike rates again in September but then pause, economists predict
Reuters poll shows experts expect a second ECB rate hike in September followed by a potential pause
1ECB's September Move
Economists surveyed by Reuters unanimously expect the European Central Bank (ECB) to implement a second rate hike in September. This move would follow July's increase, raising the deposit rate to 3.75%. However, analysts suggest this might conclude the current tightening cycle. The gradual control of inflation across the eurozone is influencing this potential pause, with policymakers balancing price stability against growth concerns.
2Economists' Consensus
The Reuters poll shows 80% of 60 economists predict a 25 basis point hike in September, while only 20% anticipate a more aggressive 50 basis point increase. Experts note the ECB will likely adopt a more cautious approach after July's move, closely monitoring economic growth indicators. Germany's technical recession could particularly influence the decision-making process, potentially prompting earlier pause considerations.
3Inflation Dynamics
While eurozone inflation slowed to 5.5% annually in June, it remains well above ECB's 2% target. Core inflation (excluding energy and food) persists at record 5.4%. President Lagarde maintains that while the inflation battle isn't over, progress is evident. Declining energy prices and normalized supply chains contribute to easing price pressures, though services inflation remains stubbornly high.
4Growth Concerns
Economic slowdown significantly impacts ECB's rate decisions. The eurozone grew just 0.3% in Q2, with Germany contracting. Weak industrial production and declining consumer spending raise recession risks. Many analysts warn excessive tightening could push the economy into deeper contraction, creating policy dilemma between fighting inflation and supporting growth.
5Global Central Bank Comparison
The ECB's gradual approach contrasts with the Fed's aggressive 500 basis point hikes since 2022. The Bank of England faces different challenges with UK inflation at 8.7%. ECB's caution reflects structural differences within the heterogeneous eurozone economy, where member states experience varying inflation and growth dynamics, complicating unified policy responses.
6Banking Sector Impact
Rate hikes boost eurozone banks' net interest margins but suppress loan demand. Italian and Spanish banks report improved profitability, while mortgage applications dropped 30%. A potential pause could stabilize borrowing costs but banks remain wary of inflation resurgence risks. ECB's ongoing balance sheet reduction (QT) adds another layer of complexity to banking sector liquidity conditions.
7Euro and Market Reactions
Rate hike expectations strengthened the euro against the dollar recently, but signals of impending pause could reverse gains. German 10-year bond yields hover around 2.5%. Market participants anticipate ECB might slow its quantitative tightening program if economic conditions deteriorate further, with focus shifting from inflation control to growth support.
8Outlook and Implications
September's expected hike may mark ECB's final major move in this tightening cycle. Growth slowdown and banking risks prompt cautious policymaking. Economists suggest rate cuts could emerge in 2024 if inflation falls toward 3%, though premature easing remains unlikely. The eurozone faces critical months ahead, balancing inflation control with recession prevention amid global economic uncertainty.
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