Central bankers love to steer the market, but the messages coming from European Central Bank officials on what they will do on Thursday are anything but crystal clear.
Swaps trading imply a roughly one-in-three chance the ECB will hike interest rates next week from the deposit rate’s current 3.75%. That’s as the central bank has to balance inflation still uncomfortably high, at 5.3% year-over-year for both the headline and for core, with survey data showing the economy weakening, if not unravelling.
The HCOB eurozone composite PMI fell to a 33-month low in August of 46.7, on a scale where readings below 50 indicate deteriorating conditions. Eurozone GDP was revised lower for the second quarter to show scant 0.1% quarter-on-quarter growth. The outlook for key trading partner China is as muddy as ever.
It’s worth noting what ECB executive board member Isabel Schnabel said in a speech at the end of August. She didn’t outright tip her hand in either direction, but noted growth prospects were weaker than what the ECB staff projected in June. Analysts at Barclays say the staff forecast for GDP will be revised downward for 2023 by three-tenths of a percentage point, and the 2024 forecast will be cut by a half point.
“Should we judge that the policy stance is inconsistent with a timely return of inflation to our 2% target, a further increase in interest rates would be warranted. In an environment of tight labor markets and structural inflationary headwinds, this would also insure against the continued elevated risk of inflation remaining above our target for too long,” said Schnabel.
“By contrast, should our assessment of the transmission of monetary policy suggest that the pace of disinflation is proceeding as desired, we may afford to wait until our next meeting to gather more evidence on how the slowdown in aggregate demand will feed through to price and wage-setting over time.”
Michael Brown, market analyst at Trader X, said Schnabel’s speech was what led him to expect the ECB will keep rates steady. “That’s what tipped the balance for me, probably the most influential hawk on the [governing council] turning more dovish/cautious,” he said. While he said it’s easy to make either case, the balance of risk tilts towards unchanged interest rates.
Sandra Horsfield, an economist at Investec Bank, said ECB officials including President Christine Lagarde will make clear that a pause on rate hikes won’t necessarily mean an end of them.
“The account of the latest meeting made clear that the likely bone of contention for the ECB is going to be how much disinflation one can expect amid a weaker activity outlook. It is fair to say that the jury is still out on this, and a consensus is unlikely,” she said. While forecasting a pause, she said “the resumption of future tightening will be firmly on the table for subsequent meetings should conditions warrant it.”