ECB Nears June Rate Hike Decision but July Remains Uncertain Amid Inflation
ECB Rate Hike Outlook and Economic Factors
By Balazs Koranyi and Francesco Canepa
June Rate Hike Likely, July Decision Unclear
FRANKFURT, May 20 (Reuters) - The case for a European Central Bank rate hike in June is nearly sealed but the bank is likely to be noncommittal about any further move, looking to temper bets for a quick follow-up step in July, four sources told Reuters.
The ECB kept rates unchanged in April but it debated a hike and signalled that a move on June 11 was likely given persistently high energy costs.
Inflation Pressures and Energy Costs
The inflation outlook is now moving towards the bank’s adverse scenario and no peace in Iran is in sight, so the bank must act at its next meeting, because price growth is already at 3%, well above the 2% target, and the bank also needed to preserve credibility after signalling the move, the sources said.
Even if a peace agreement was reached before the meeting, there would be no assurances that it holds and energy prices would remain high for some time because it takes time for the market to normalise, they added.
An ECB spokesperson declined to comment. The sources said no decision has actually been made yet.
Follow-up Hike Timing and Market Expectations
A follow-up hike is not urgent, however, as price pressures are far more benign than in 2022, when the last major inflation shock hit, and second-round effects from the price spike are not yet visible, the sources added.
Expensive energy and a soft labour market will also weigh on growth and ultimately dampen price pressures in the medium term, the time horizon most relevant for policymakers.
These factors suggest that the bank may be able to skip July and wait for fresh projections in September, unless there was a dramatic deterioration in the inflation outlook.
Financial markets are now pricing three hikes from the ECB over the next year, with the first step fully priced in by July and the last one by February.
Growth Concerns and Economic Projections
Three of the sources noted that weak growth was the biggest reason why any policy tightening must be cautious.
While the economy proved unexpectedly resilient in recent shocks, it is in a weaker position now than in earlier episodes and the energy shock, especially if it is coupled with shortages of certain products like jet fuel or diesel, could dampen the growth outlook.
In fact, two of the sources suggested that the ECB's own projections, which showed just a modest dip in economic growth, may be overly optimistic and may be subject to a downward revision.
Peace Prospects and Policy Flexibility
Hopes for a meaningful peace deal also support the case for waiting a bit longer before any follow-up hike as energy prices could tumble if one is reached.
All the sources noted, however, that this outlook could rapidly change since political decisions are driving the outlook.
(Reporting by Balazs Koranyi and Francesco Canepa; Editing by Hugh Lawson)
