European Central Bank to Maintain Steady Rates Amid Economic Slowdown
The European Central Bank (ECB) is expected to keep interest rates unchanged on Thursday as the euro area experiences a faster deceleration in economic activity than previously anticipated.
Inflation is eroding consumers’ disposable income, causing shoppers in the region to cut back on spending. Additionally, the manufacturing sector has been in decline since around mid-2022.
While economic theory suggests that these factors would lead to lower inflation, there is ongoing debate within the ECB as to whether this will be the case. Some argue that weaker growth will eventually translate into lower inflation, while others believe that part of the growth weakness is due to supply-related issues rather than demand.
“As a result, price pressures might be less affected by weaker growth than expected,” explained Paul Hollingsworth, chief economist at BNP Paribas.
In August, headline inflation came in slightly higher than expected at 5.3%. However, core inflation, which excludes energy and food and is closely monitored by the ECB as an indicator of underlying price pressures, fell in line with expectations to 5.3% as well, down from 5.5% the previous month.
Further insights into the ECB’s views on inflation and growth projections will be revealed in the upcoming staff projections on Thursday. Market expectations include revisions to the ECB’s GDP and inflation outlook.
“Given the recent data, the staff is likely to revise down the short-term growth outlook,” noted Mark Wall, an ECB watcher at Deutsche Bank.
“Tighter financial conditions and slower growth should lead to lower core inflation levels by the end of the forecast period,” Wall added.
However, the outlook remains highly uncertain, as emphasized by ECB President Christine Lagarde at the annual Jackson Hole conference held by the Federal Reserve.
“We must form a forward-looking view of the future and make decisions accordingly,” stated Lagarde in her speech. “However, we will only truly understand the effects of our decisions in hindsight.”
