ECB Likely to Raise Rates Again Amid Elevated Inflation
In the euro area, inflation remains stubbornly high, with August figures showing a 9.1% increase. Given the surge in prices, the probability that the European Central Bank Governing Council will enact another quarter-point rate rise is rising, potentially marking the steepest increase in the institution’s history. The ECB has previously implemented a similar move only once, on December 10, 2008, during the financial crisis when policy was tightened in response to upheaval in markets.
Last July, the central bank initiated its first half-point rate lift in eleven years. With rates now at 0.50% and the deposit facility at 0%, the euro zone has exited negative rates for the first time since the crisis era. The ECB is showing less concern about a lasting inflation trap or an outright recession and is focusing on cooling demand as supply constraints push prices higher amid strong demand.
Energy and food prices are likely to stay elevated, and wage growth could remain robust after a long period of stagnation. Companies face higher costs from energy, inputs, and logistics, which are increasingly being passed through to prices for goods and services. Supply bottlenecks in manufactured goods also pressure prices upward. Additionally, a weaker euro amplifies the cost of energy and other raw materials.
Wage demands are rising across many euro-area economies, including Germany, the region’s largest economy. If Russia disrupts energy supplies and production must halt, the risk of a recession grows and households may cut spending to avoid prohibitive energy bills.
Chief economist Gilles Moëc of AXA Investment Managers has shifted his view, now expecting a 75 basis point move in August due to the rapid rise in consumer prices. Several ECB Council members favor a 75 basis point increase, while others advocate a more modest 50 basis points. Moëc notes that the softer, lower-rate faction appears less vocally opposed, suggesting a stronger willingness within the council to curb demand if wages accelerate and threaten to embed higher prices into a new inflation regime. — Moëc, AXA Investment Managers.
Moëc also argues that the Frankfurt recession could be the mechanism through which inflation is eventually brought under control, framing it as a deliberate outcome of the necessary monetary tightening rather than a byproduct. This perspective underscores the view that price stability may require painful adjustments in the near term. — Moëc, AXA Investment Managers.
Alternative voices, like Konstantin Veit, a portfolio manager at Pimco, foresee a 50 basis point increase and anticipate that the ECB will signal further rate hikes as appropriate. Veit expects the central bank to steer official rates toward neutral territory at a measured pace, with 50 basis point increases anticipated in October and December, followed by 25 basis point rises next year as the policy stance shifts from normalization to tightening. — Konstantin Veit, Pimco.
Analysts at MFS Investment Management, including Annalisa Piazza, warn that inflation is likely to stay above target for longer, which may push the ECB to advance the rate hike cycle before the euro area slips into recession this year. Piazza suggests a baseline scenario where key interest rates rise by 50 basis points in September, October, and December, with a later pause to reassess the broader economic picture and a potential neutral stance near 1.5%. — Annamarie Piazza, MFS Investment Management.
The ECB is set to publish updated quarterly macroeconomic forecasts on Thursday, which are expected to show weaker growth and higher inflation. Earlier projections had inflation at around 6.8% for the year and growth near 2.8% in 2022. The June estimates projected inflation of about 3.5% and growth of 2.1% for 2023, with similar growth in 2024. — ECB projections overview.
In summary, the central bank faces a delicate balancing act: containing runaway prices while avoiding a sharp slowdown that could spread recessionary risks across the euro area. The upcoming policy moves and forecasts will be closely watched by markets and households alike as they navigate an environment of elevated energy costs, persistent supply constraints, and evolving wage dynamics. — Market commentary and central bank projections.