The European Central Bank’s (ECB’s) decision last week to signal that its interest rate may now have peaked was not unanimous.
“I don’t agree we’re definitely done,” one ECB governing council member said to the Financial Times. “We would need a very negative surprise [regarding inflation] to hike again in October, but we might in December.”
Regarding a quarter-point bump in December, “I’m not ruling it out,” another told the FT.
ECB president Christine Lagarde said on 14 September that the bank’s interest rate has “reached levels that, maintained for a sufficiently long duration, will make a substantial contribution” to inflation falling to the bank’s 2-percent target.
Her comment prompted analysts and investors to assume that the bank’s quarter-point rate increase last week was the final one this cycle. Some now assume the bank will cut rates as soon as early next year.
Lagarde dismissed talk of cuts in a later public comment, saying “We’ve not decided, discussed, or even pronounced ‘cuts’.”
Inflation’s trajectory remains uncertain in the face of continuing wage gains among Europe’s workers, the FT said. Dutch unions reportedly have just won a 10-percent pay increase.
Labor costs across the Eurozone rose 4.5 percent in this year’s second quarter, year on year, according to Eurostat, the European Union’s statistics agency. While still strong, the increase is less than the 5.2 percent seen in the first quarter and the 5.9 percent in 2022’s final three months.
Wage rates appear to be stabilizing, the FT said.
However, pay increases were a key factor in boosting inflation in the region’s services sector to 5.5 percent in August, according to Lagarde.
Eurozone inflation will reach the ECB’s 2-percent target by late 2025, the bank has predicted.
TREND FORECAST: Some governing council members, particularly those from northern Europe, are willing to drive the Eurozone into a recession if that will quell inflation. In contrast, an increasingly vocal group thinks the rate already is too high.
The bank’s internal battle will continue through the Autumn. If inflation does not fall in September and October, the hawks will gain the upper hand. And should they again raise interest rates, it will drag much of the EU into deep recession. Again, as we have noted, the economic bounce in parts of the EU pushed up high levels of tourism … not manufacturing. Now, with the summer over and autumn setting in, plus the high energy costs, should the ECB raise interest rates it will cause great economic destruction.