Commerzbank economists led by Dr. Marco Wagner and Dr. Jörg Krämer expect the European Central Bank (ECB) to leave rates unchanged in July but still deliver a further 25 bps hike in September. Their ChatECB AI indicator remains in hawkish territory, while Euro area inflation is seen staying just below 3% as core inflation and inflation expectations trend higher, keeping the ECB biased to tighten.

July pause, September hike risk

"The ECB is unlikely to raise its key interest rates for the second time in a row next week. However, another rate hike is likely at the meeting in September. Our revised ChatECB indicator shows that ECB Governing Council members are leaning toward higher interest rates—especially since core inflation is expected to rise in the coming months and households’ inflation expectations have increased."

"Consequently, despite the downward trend in energy prices, the inflation rate in the euro area is likely to remain just below 3% in the coming months, partly because core inflation—that is, the inflation rate excluding the volatile prices of energy, food, and beverages—is expected to trend upward."

"Both the emerging indirect effects from the pass-through of higher energy costs and the higher inflation expectations have the potential to turn a temporarily higher inflation rate into a more persistent phenomenon. In this regard, another interest rate hike would likely make sense from the ECB’s perspective to send a clear signal to consumers. Furthermore, a second interest rate hike by the ECB is widely expected."

"We also expect another rate hike because the deposit rate, at 2.50%, would still be in the range of the neutral rate and thus likely not yet restrictive. Just recently, Chief Economist Lane placed the upper limit of the neutral rate at 2.5%. According to our tally based on comments, most other ECB Governing Council members also estimate the neutral interest rate to be between 2% and 2.5%."

"Nevertheless, we still forecast a rate hike at the September meeting, when ECB economists will present their new projections. This is because central bank officials continue to monitor the situation “closely,” which, in central bank jargon, points to a tendency toward monetary tightening. Furthermore, despite the recent decline, our ChatECB Index, at a value of 0.37, remains at a level at which ECB policymakers have historically tended to raise key interest rates."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)