The ECB will raise interest rates at this week’s meeting, but September’s is "open"

July 24 () –

The European Central Bank (ECB) will raise interest rates at this week’s meeting, but will keep the possibilities “open” for the September meeting, according to analysts reported by Europa Press.

BANK OF AMERICA

Rubén Segura-Cayuela, Bank of America’s chief economist for Europe, forecasts that the ECB will raise interest rates by 25 basis points, something that should not surprise markets as it has been “widely telegraphed”.

Segura-Cayuela believes that the “key” will be in what is known for the next meeting in September. “With an outlook that hasn’t changed much since the June meeting, we wouldn’t expect clear guidance. If they weren’t ready in June, it’s unlikely they will be now, given the absence of any solid news in either direction,” he explained.

In this way, it points to the document that supports the rate hike and the subsequent press conference as a “position marker” that throws clues about the set of forecasts and the evolution of the data until then.

Bank of America expects further emphasis on the hike for longer, although clearer guidance on this is likely to come. And given the June forecast, they expect “the burden of proof for not going up in September would fall on the need for the inflation outlook to improve,” a “softer” version of the kind of guidance we saw in March.

Coupled with falling core inflation, Bank of America expects no rise in September, but it’s still a very “close” call, as some of the ECB hawks imply.

“With a central bank that attributes disproportionate weight to underlying inflation in its decisions, developments in data since the June meeting are unlikely to provide a clear trigger to overcome internal disagreement over what to do beyond next week, hence the decision is left wide open.”

On the other hand, Bank of America points to June 2024 as the valid date for the first rate cut given our inflation forecasts and much weaker growth prospects.

GENERAL INVESTMENTS

From Generali Investments, the house’s head of analysis, Vincent Chaigneau, believes that the ECB will raise rates to 3.75% in July and that it will not do so again afterwards. “Risks are skewed to the upside as inflation remains too high,” he reasoned.

However, he believes that the European economy is suffering from “aggressive” inflation, which the ECB “will be tempted to fight, further suppressing demand.”

“Thus, the market predicts two more increases by the ECB, up to 4%”, Chaignaeu has also assessed despite the fact that he acknowledges that the GDP in the euro area has not recovered the pre-crisis level, so that the level of overheating in the Old Continent is not as high as in the case of the United States.

T. ROWE PRICE

For its part, the US investment fund T. Rowe Price has highlighted that the PMI data for the euro area released this morning and which reflects a deterioration in private sector activity has accentuated in July as a result of worsening demand, particularly in the manufacturing sector.

The chief economist at T. Rowe Price, Tomasz Wieladek, has explained that the drop in demand for manufactured products around the world is affecting large exporting economies, such as Germany, whose industry cannot “pull” uncompleted orders because these are at normal levels, as reported by the IFO Institute.

The economist predicts that, despite the “clear signs that European activity is slipping into recession”, the ECB will continue its policy of monetary tightening. However, he believes that in September the decision will remain “open”, since by then the inflation and unemployment data will be “more relevant”.

Given the weak demand, it is “more likely” that the eurozone manufacturing PMI will remain “very weak” in the third and fourth quarters of 2023. Wieladek also sees the services PMI deteriorating in the summer, turning into negative 48 in September or October.

NOMURA

Nomura is also betting that there will be no surprises at the next ECB meeting in July, which is why he will raise rates, although he will avoid giving guidance on September to be “open to any possibility”, especially to potential new increases.

In his latest report, Nomura raises his inflation forecasts in the eurozone for 2025 to 2.1% and to 2.2% for core inflation.