The worries of the ECB’s policymakers about the economy's growth prospects have grown in recent months. While the discussion is still ongoing, there are signs that rate increases may be put on hold.
After nine meetings, the ECB has decided to hike rates further in an effort to curb inflation. The last time this occurred was on July 27 and the upcoming meeting in September may result in a decision to either ease off or tighten the policy.
A rise in pause supporters is suggested by discussions with eight European lawmakers and attendees of the US Federal Reserve Symposium in Jackson Hole. The probability of a recession has increased dramatically as a result of recent economic data that has consistently come in below expectations.
More information that is released means more people will support the pause, one of the sources said.
There are, however, those who believe that a rate hike or a pause are equally probable scenarios. None of the sources, despite the fact that they are leaning in the direction of this possibility, claim that a price hike is the most likely outcome.
This change in outlook contrasts with that of six weeks ago when a September rate increase was considered to be the most likely scenario.
Regardless of the discussions, all sources agree that the ECB will have to stress that its job is not yet done and that additional tightening of policy may be required.
Inflation in the euro area is currently at 5.3%, thus this procedure could take many months, possibly even until early 2024, to ensure inflation reaches the ECB's 2% target.
Sources also agree that the ultimate decision won’t be passed before the release of inflation figures on August 31 and the ECB’s new economic forecasts. The European Central Bank will hold its next meeting on September 14th.
The market expectations are currently split evenly between the possibility of a rate hike in September and the chance of a pause in rate increases. That being said, at some point later this year, the ECB is anticipated to hike interest rates by 25 basis points, bringing the total to 4%.
A weakening of China's economic outlook, rising wages, and the assumption that prior rate hikes are already starting to affect the economy are some of the factors that are serving as the basis for arguments in favor of a pause in hiking interest rates.
On the flip side, supporters of further tightening believe that core inflation has only just begun to drop and that a pause is necessary to justify the pause by strong evidence that inflation will return to its goal level without the risk of surpassing 2%.
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