MNI ECB WATCH: Data Key To Next Move After July's Likely Hike

The European Central Bank is set to raise benchmark interest rates by 25 basis points on Thursday, taking the deposit rate to its highest level since May 2001 in line with guidance from President Christine Lagarde in June, but it is likely to signal that another hike when it next meets in September will be contingent on incoming data.

Weak flash PMI readings and a bank lending survey already suggest falling demand for loans, arguing for the Governing Council to reflect on the future direction of policy during a summer break which will see July and flash August inflation, August PMI, second quarter GDP and July employment data all published before the mid-September meeting. Headline inflation is likely to fall from the current 5.5%, though the core measure will ease more slowly. (MNI SOURCES: Data Deluge Clouds Early ECB September Rate Call).

Even more hawkish Governing Council members have toned down rhetoric in recent weeks. Dutch central bank head Klaas Knot said hikes beyond July were not a given and Bundesbank President Joachim Nagel has said that data will be key to September decision. Latvia's central bank governor Martins Kazaks, speaking to MNI at the ECB's Sintra forum, said there was unlikely to be a September steer. (MNI INTERVIEW: Kazaks Sees No Detailed Steer For September)

MORE CAUTIOUS GUIDANCE

Lagarde, who said after June’s 25bp hike that another rate rise was likely in July barring a material change in the baseline, is expected to be more cautious in her guidance this month, highlighting that inflation remains too high but that decisions will be made on a meeting-by-meeting basis.

A 25bp hike this week will take the current benchmark deposit rate to 3.75%, the highest for 22 years and the joint-highest of the ECB’s 25-year history.

The ECB Bank Lending Survey published on July 25 indicated that policy is transmitting through to the real economy, with demand for loans drying up and lending conditions tightening. There is a growing concern that non-performing loans could soon rise, with some lenders indicating that they are adding to provisions.

Thursday’s meeting is likely to see the Governing Council discuss the ECB’s balance sheet in light of the ongoing operational framework review and last month’s TLTRO maturity, but no formal announcements are expected this month. Active APP sales are unlikely to be nodded through in July, while an early end to PEPP reinvestments, ahead of the current end-2024 guidance, looks set to be a discussion for another day.