ECB eyed for 25bp hike

ING said on Thursday that the European Central Bank looks increasingly likely to raise interest rates by 25 basis points next week, even as its own economists warned that energy-led inflation complicates the case for much more tightening. The call comes ahead of the ECB’s September 9-10 monetary policy meeting in Berlin, where policymakers will weigh a renewed pickup in euro zone inflation against the risk of adding stress to financial markets. Ireland’s central bank governor, Gabriel Makhlouf, added to the hawkish tone on Wednesday by saying inflation above 3% combined with robust growth left him “uneasy” and meant the ECB had to be ready to raise rates further. Eurostat’s flash estimate for August put euro area inflation at 3.3%, up from 2.9% in July. ### Why are investors focused on a quarter-point move now? ING said in a note published on September 3 that “the stage looks increasingly set” for another ECB increase, which it described as a second rate hike this year and a move aimed at reinforcing the central bank’s credibility. The bank said the case for action had strengthened after the latest inflation data and after signals from the ECB’s July meeting that some policymakers had already argued for a hike. (think.ing.com) The ECB’s official calendar shows the Governing Council will hold its next monetary policy meeting on September 9 and 10 in Berlin, with a press conference scheduled after the Day 2 decision. That timing has made next week’s meeting the focal point for markets trying to judge whether July’s pause was temporary. ### What changed in the inflation picture? (think.ing.com) Eurostat’s August flash estimate showed annual inflation in the euro area rising to 3.3% from 2.9% in July, according to the statistical office’s release as carried by multiple reports. That move pushed inflation further above the ECB’s 2% target and gave hawkish policymakers fresh evidence that price pressures had not settled back. (ecb.europa.eu) The Irish Times reported that higher energy costs were a main driver of the August increase, alongside a pickup in services prices. ING said that composition matters because a rate increase can signal resolve, but tighter borrowing costs are a less direct tool against an inflation shock driven primarily by energy. ### What exactly did Gabriel Makhlouf say? (msn.com) Gabriel Makhlouf, governor of the Central Bank of Ireland and a member of the ECB’s Governing Council, said the ECB must be ready to raise interest rates further if inflation starts “moving in the wrong direction,” according to The Irish Times. The newspaper said Makhlouf argued that inflation above 3% together with robust growth made him “uneasy.” (irishtimes.com) Those comments matter because Makhlouf’s remarks came one day after the latest inflation print and one week before the ECB meeting. They also fit with a broader shift in tone since July, when the ECB left rates unchanged but, according to ING’s earlier analysis, left the door open to a September move. ### Why are economists warning about market turbulence? (irishtimes.com) ING said a further increase could amount to an “insurance rate hike” designed to pre-empt second-round effects from the energy shock, even if the central bank does not use that label itself. The bank also warned that if inflation remains mainly energy-driven, pushing rates much further would make little sense and could hurt the euro zone economy while creating more market turmoil. (irishtimes.com) That leaves the ECB balancing two risks at once. A pause could be read as tolerance for inflation above target, while another hike could tighten financial conditions in response to a supply-side price shock that monetary policy can only partly address, according to ING’s analysis. ### What happens next in Berlin? (think.ing.com) September 10 is the next fixed point for investors, borrowers and euro zone governments. The ECB is scheduled to announce its policy decision that day after the September 9-10 Governing Council meeting hosted by the Deutsche Bundesbank in Berlin, followed by President Christine Lagarde’s press conference. (ecb.europa.eu) (think.ing.com)