ECB’s hike-or-pause dilemma on interest rates going down to wire, poll shows

Economists see the European Central Bank (ECB) lifting interest rates one last time to tame inflation - they’re just not sure it will happen next week.

A Bloomberg survey shows an almost even split between those anticipating a 10th consecutive hike on Thursday and those anticipating a “hawkish pause” before the deposit rate reaches a record 4 per cent in October.

Respondents see the ECB confirming by December that borrowing costs are at the peak. They’re pencilling in a first rate cut of three in 2024 for March - well before ECB officials are themselves suggesting reductions may start.

Economists’ expectations aren’t overly dissimilar to financial-market bets. Traders price a 40 per cent chance of a move next week and see a 70 per cent probability of one materialising by year-end.

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The results mirror the diverging views on the ECBs governing council as Frankfurt’s most forceful bout of monetary tightening draws to a close. Opinions range from Slovakia’s Peter Kazimir, who’d like a final rate increase this month to be assured that inflation will indeed return to the 2 per cent target – to Portugal’s Mario Centeno, who frets about the consequences of doing too much as Europe’s economy wobbles.

Policymakers may also have an eye on the Federal Reserve, which meets the following week and is expected to leave borrowing costs unchanged.

“The ECB will have to balance between a dovish hike or a hawkish pause – not an easy one,” said Carsten Brzeski, ING’s head of macro. “A pause of the hiking cycle would be the best to do. However, as a pause currently runs a high risk of turning into a full stop, ECB hawks will probably push for one final hike.”

Whatever the decision, survey respondents say ECB president Christine Lagarde and her colleagues will settle on the appropriate monetary stance, with roughly four-fifths saying the ECB will neither stop raising rates too early nor tighten too far.

“The biggest challenge will be to offer guidance in an environment where they’ve pretty much said that no guidance can, or will be offered,” said Claus Vistesen, chief euro-zone economist at Pantheon Macroeconomics.

Updated economic projections may help. In June, they showed inflation averaging 2.2 per cent in 2025 – just exceeding the ECB’s goal – with a gauge excluding volatile items such as food and energy higher still.

Analysts are torn on whether September will see that outlook confirmed, or hint at an improvement. They do expect it to reveal weaker economic expansion this year and next.

Underscoring such trends, data Friday confirmed German inflation at 6.4 per cent for August, even as its economy risks slipping back into recession.

“The ECB is more concerned about inflation not returning to target in a timely manner than the economy falling into recession,” said Piet Christiansen, chief strategist at Danske Bank. “I don’t think the ECB will pause given that the rate path is the primary policy tool.”

Whatever haggling takes place, Ms Lagarde’s immediate focus will remain on rates.

“Communication is likely to prove materially challenging,” said Andrzej Szczepaniak, an economist at Nomura. “Painting of a picture of unity will likely prove very difficult while there’s increasing public disagreement among Governing Council members over whether the ECB should raise rates any further, as well as over how long to keep rates set at restrictive levels.” - Bloomberg