ECB: FINALLY AT THE INTEREST RATE PEAK? – COMMERZBANK

Dr Jörg Krämer, Chief Economist at Commerzbank, offers a brief preview of the upcoming European Central Bank (ECB) policy meeting scheduled next Thursday and expects that council members will probably vote for unchanged key rates.

Key Quotes:

“In view of the weak economy and the downward trend in the inflation rate, the ECB is unlikely to raise its key interest rates further next week, and interest rates are also likely to remain unchanged at subsequent meetings. The same applies to the coming year, as underlying inflation is likely to prove stubborn, especially in the services sector.”

“The economic outlook has deteriorated significantly recently: manufacturing output plummeted in March and has not recovered significantly since then. In addition, the service sector has recently shown clear signs of weakness. The corresponding purchasing managers' index fell sharply again in August and is now in a range that signalled a recession in earlier phases.”

“We expect the ECB to revise down its growth forecast by three-tenths of a percentage point for 2023 and almost halve it for 2024 (Table 1). This is why opponents of further interest rate hikes are likely to point out that the more restrictive monetary policy is having the desired effect on the real economy, i.e. the transmission process is working well.”

“At the same time, the inflation rate has been falling until recently and at 5.3% in August was only half as high as at its peak in October. Although the inflation rate for energy has probably bottomed out, it is likely to come down noticeably in the coming months for food, as the sharp price increases last autumn and winter gradually fall out of the year-on-year comparison. The core inflation rate should also continue to decline, as the prices of (non-energy) industrial goods in particular are hardly likely to increase.”

“However, the decision to leave the key interest rate unchanged is unlikely to be unanimous. This is why ECB President Lagarde is likely to explicitly leave the door open for further rate hikes at the press conference, so that the markets are likely to interpret this as a "hawkish rate pause". However, since the economic situation is likely to deteriorate further for the time being and a recession is becoming more and more apparent for the euro area, a further interest rate hike is hardly to be expected. Rather, the ECB is likely to have reached its high point for the time being with the 3.75% deposit rate reached in July