Falling inflation allowed postponing rate hikes
The decision in July to keep interest rates unchanged was driven by weakening inflation in the eurozone. Both core inflation, excluding volatile energy and food prices, and service inflation closely linked to wage growth decreased. This was mainly due to the drop in oil prices from 117 USD per barrel in mid-May to 70 USD per barrel at the beginning of July. These changes gave the ECB the opportunity to refrain from raising rates and wait for more data on the latest economic trends.
Another important factor is the insufficient amount of data. The escalation of the conflict in Iran is a fairly recent event, and the ECB currently does not have enough information to fully assess its impact on the eurozone economy and inflation. Moreover, higher prices have not yet translated into faster wage growth, which would indicate more persistent inflationary pressure.
ECB signals further rate hikes
In recent weeks, the situation has become more complicated. The escalation of the conflict in the Middle East has increased global oil and natural gas prices – on July 23, Brent oil reached 100 USD per barrel. Prices fell this week to about 87 USD per barrel, but the situation remains volatile and unpredictable. This increases the risk that higher energy costs could again accelerate inflation across the eurozone.
Although the ECB cannot directly influence oil or gas prices, central banks traditionally respond to such inflation risks to prevent broader price pressures from spreading throughout the economy. Therefore, rising energy prices have become one of the main arguments for raising interest rates.
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Recent ECB representatives’ comments also indicate a possible further rate hike. The ECB continues to emphasize that inflation may remain above the 2% target in the coming years, suggesting that monetary policy is likely to remain tight and interest rates relatively high. At the same time, although eurozone economic growth remains modest, the economy is not in recession. Recent data even show gradually recovering economic activity. This allows the ECB to focus on controlling inflation rather than stimulating economic growth.
Before the September meeting, the ECB will receive a considerable amount of new data on inflation, economic growth, wage changes, as well as business and consumer sentiment. These indicators will be important for making the final decision. However, based on the currently available information and the latest ECB statements, the most likely outcome at the upcoming central bank meeting on September 10 is a 25 basis point interest rate increase, raising the deposit facility rate to 2.5%.
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