FRANKFURT, Sept. 1 — The European Central Bank is increasingly likely to raise interest rates at its September meeting, according to an analysis of the minutes from its July policy gathering, released on Aug. 27. The document reveals that at the July 17-18 meeting, where rates were left unchanged, some Governing Council members had argued in favor of a hike but ultimately backed the hold decision.
Carsten Brzeski, Global Head of Macro at ING, argues that the debate, combined with recent macro data, strengthens the case for a move when the council meets again on Sept. 12. The mechanics here are worth unpacking.
Since the July meeting, the eurozone economy has shown unexpected resilience to the war in the Middle East. Brzeski attributes part of that to luck, noting Asian competitors were hit harder by the closure of the Strait of Hormuz, losing orders to European rivals. Long-announced fiscal stimulus has also helped.
At the same time, headline inflation has continued to edge higher, with the Harmonised Index of Consumer Prices at 2.6% year-on-year in July, up from 2.5% in June. The catch is the nature of the shock.
The analysis notes the ECB is still struggling with how to react to a textbook supply-side shock, with the debate over the precise reaction function happening behind closed doors. But with oil prices remaining elevated and the risk of a fresh gas price shock increasing, most policymakers are likely to see the case for another hike. ECB Executive Board member Isabel Schnabel’s recent comments to Bloomberg point in the same direction, the analysis says.
Follow the money on the rate path. The ECB has been in a tightening cycle since July 2022, raising rates by a cumulative 425 basis points through September 2023, before pausing in October 2023 and resuming with a 25-basis-point hike in June 2024. The main refinancing rate currently stands at 4.25%, with the deposit facility rate at 3.75%.
Eurostat data shows the eurozone economy grew by 0.3% quarter-on-quarter in the second quarter of 2024. On closer reading, Brzeski suggests that even if the ECB dislikes the term, a second hike this year would fall into the category of an “insurance rate hike.” More to the ECB’s liking, he says, is framing it as a move to strengthen credibility and preempt any indirect or second-round effects from the current supply-side shock.
A growing number of members appear to favor that pre-emptive approach. What to watch next: the Sept. 12 decision, and whether Lagarde can sell a hike as credibility-building rather than a reaction to geopolitical luck. The inflation data for August, due before the meeting, will likely settle the argument.
