The European Central Bank may pause its second rate hike next week but will keep the option open for a raise in September.
After energy prices surged, eurozone officials raised borrowing costs in June. They initially expressed confidence that peace talks between Washington and Tehran would limit the impact of the conflict on eurozone consumer prices.
However, according to Greek central bank governor Yannis Stournaras, the renewed conflict and uncertainty over shipping in the Strait of Hormuz have brought them back to square one.
Data since the June meeting is unlikely to prompt European Central Bank officials to act immediately on Thursday. Oil and gas prices are close to the policymakers’ baseline scenario set last month, and inflation has slowed more than expected. The ECB’s bank lending survey, to be released on Tuesday, is unlikely to significantly affect the outlook.
This gives officials time to assess how the situation develops over the summer. President Christine Lagarde can point out that a large volume of data will be released before the September meeting, including two new inflation reports, second-quarter economic growth figures, and several business surveys.
First, S&P Global will release its monthly purchasing managers’ index this Friday. In June, the eurozone’s composite PMI rose to 50, exactly at the threshold between economic expansion and contraction.
Investors and economists believe this new information will ultimately convince the European Central Bank’s governing council to further tighten monetary policy in its decision on September 10.
“Unless economic activity data shows a significant decline between now and the September meeting, the government is more likely to keep interest rates unchanged as long as energy prices don’t surge wildly,” said Ruben Segura-Cayuela, an economist at Bank of America. “But there are currently no signs that economic activity will deteriorate severely.”
Simone D’Alia, chief economist for the eurozone, predicted, “We expect the European Central Bank to keep borrowing costs unchanged in July and then carry out its final rate hike in September. A tightening credit environment will further dampen the inflation impact of the energy shock, such as limited second-round effects, thereby avoiding the need for further interest rate increases.”
