ECB likely to pause rate rises

• The European Central Bank (ECB) raised its interest rates by 25 basis points at its most recent monetary policy meeting, on July 27th, in line with our expectations. This took the cumulative increase in policy rates since July 2022 to 425 basis points, with the deposit rate now at 3.75% and the main refinancing rate at 4.25%—their highest levels in 22 years. The ECB president, Christine Lagarde, emphasised her commitment to following a “data-dependent approach”, and raised the possibility of a pause in the tightening cycle at the ECB’s next meeting on September 14th if forthcoming data show that inflation is slowing more significantly towards the bank’s 2% medium-term target.

• We expect the ECB to pause its tightening cycle in September, with rates then remaining on hold until mid-2024. The further easing of inflationary pressures that we expect in August should provide arguments for ECB policymakers to keep interest rates stable. However, core inflation (excluding energy and food prices) remains high—driven in part by strong wage growth and firms’ robust profit margins. Real GDP growth proved more resilient than expected in the second quarter, and the euro zone unemployment rate fell to a record low of 6.4% in June, suggesting that demand-side price pressures will remain robust. There is therefore a high risk that the ECB could raise interest rates further in September.

• ECB decisions will continue to be taken on a meeting-by-meeting basis, meaning that the scenario of a pause in September but rate rises at the October or November meetings is also a possibility if inflation does not subside as rapidly as expected. In the near term, households and businesses will continue to face a sharp rise in borrowing costs and tighter credit conditions. Further interest-rate rises this year—not our core forecast, but a very high risk—would dampen European growth in 2024.

The analysis and forecasts featured in this piece can be found in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the political and economic outlook for nearly 200 countries, enabling organisations to identify prospective opportunities and potential risks.