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The European Central Bank is in no position to skip a month of rate increases, not just yet.
The ECB on Thursday is expected to increase its key rate by a quarter-point, taking rates to 3.5%, bringing the cumulative increases to 4 percentage points this cycle.
The ECB rate decision comes at 2:15 p.m. Central European time (8:15 a.m. Eastern), followed by a press conference with ECB President Christine Lagarde a half-hour later.
Inflation in the eurozone has dropped to a 6.1% rate in May, Eurostat has estimated, down from a 10.6% peak in October, though that’s still well above the 2% target of the ECB. The core measure that excludes food, energy, alcohol and tobacco was 5.3% year-over-year.
Economists at Evercore ISI say that while the ECB will welcome “the reverse pass-through” of previous energy and food price increases, a continued firming in wages puts upward pressure on core inflation.
Negotiated wages grew at a 4.3% year-over-year pace in the first quarter, the fastest pace of growth in 30 years, according to economists at Nomura.
Economists at UBS say investors will want to know from the ECB whether July will mark the last increase in rates or whether it plans to continue increasing rates in September.
“We expect the broader inflation environment to slowly improve over the summer, such that the ECB will not hike rates any further in September. At that point, we believe it will declare that the first stage of the policy tightening has been completed – reaching the terminal rate – and that the second stage will start – keeping rates high until the ECB has sufficient confidence that inflation will return to 2% during 2024/25,” they say.
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