MNI SOURCES: Most At ECB See 4% Rate As Only Outside Chance

The European Central Bank is heading for at least one or two more 25 basis-point hikes over the summer, but while hawkish voices are already warning rates could reach 4% in September, the majority in the Governing Council still see this as unlikely barring an upside inflation surprise, Eurosystem officials told MNI.

The ECB is almost certain to raise the deposit rate to 3.5% on June 15 and could well hike by the same amount on July 27, with the prospect that policy settings will then remain at peak into 2024. But while some on the Governing Council already see a significant chance of a further increase to 4% in September, others point to signs of downside risks including March’s bank lending survey which showed a decline in access to credit, and note the slight easing in core inflation, which slipped to 5.6% in April from a record 5.7% the month before.

July’s bank lending survey will be available before that month’s meeting, giving policymakers more insight on the effect of 12 months of accumulated tightening, noted one official, who expected a peak of 3.75% at most. Another saw a chance that 3.5% would mark a high point for the deposit rate, but stressed that data was key, in line with the ECB’s declared meeting-by-meeting approach. (See MNI ECB WATCH: ECB Hikes 25Bps, Signals APP Reinvestments End)

SPECTRUM OF OPINION

Disagreements on the Governing Council are mainly about “data and conditions that we don’t know yet,” the second official said.

“So far, the data has not been that bad, so it’s hard for me to understand this urgency to make it clear that we will go beyond,” the official said. “There are some facts that could lead us to have to raise rates again after the summer, but at the moment I don't see them and I don't think we will.”

Asked to estimate the current spectrum of opinion within the Council, an official from a different national bank said he saw it as 60% leaning towards 3.75% and the rest towards 4%. Another source saw the split at closer to 70/30. Core inflation, which rose for 10 straight months until March, is proving difficult to tame, though, the official noted.

Another source said their bank calculates that real rates should turn “meaningfully positive for as long as it takes for core to fall back to more comfortable” territory.

“The big thing is the extent to which we witness cost-price spirals or not. Models are lost between two conflicting stories about the persistence of inflation, so much boils down to judgement,” the source said.

FINANCIAL STABILITY

Upside risks to inflation include possible energy price spikes due to the Ukraine war or rising Chinese demand for gas, or an acceleration in food prices prompted by droughts in southern Europe, though Chief Economist Philip Lane says food price inflation will begin falling later in the year. (See MNI INTERVIEW: EU Risks Winter Gas Squeeze -German Energy Head)

Financial stability is another concern as rates rise, and policymakers will also be wary of developments in the U.S. where regional banks remain under strain.

A further complication for policy makers is the disparity between national inflation rates. While the ECB targets the regional average, headline measures were at only 3.8% in Spain in April but at 7.6% in Germany and around twice that again in the Baltics.

“Let’s see where the data takes us in May and June and that will shape the debate,” said another national central bank official.

“If they really want to get to 4% by the end of summer and then be cutting rates by November, that does not look very smart to me,” the official said. “The point is not to kill the economy.”

An ECB spokesperson declined to comment.