Aberdeen: Arguments interest rate hike ECB matter
Felix Feather, Economist at Aberdeen, comments on next Thursday's ECB meeting:
'A 25-basis-point interest-rate rise to 2.5% from the ECB on Thursday is all but certain. The more important question for markets is whether the decision is portrayed as the next step of a protracted tightening cycle or retaining full flexibility.
The tone is likely to be hawkish. The eurozone economy has proved more resilient than the ECB expected, while high energy prices, stronger forward-looking wage trackers, and somewhat elevated market-based inflation expectations will keep policymakers focused on upside risks. The ECB is also likely to revise its growth forecasts higher because the economic damage from the conflict in Iran has been smaller than assumed in its June projections.
However, there remains a path to a protracted hold of interest rates at 2.5% after this meeting. Underlying inflation measures have continued to ease, wage pressures remain relatively contained and there is still only sparse evidence that the energy shock is generating widespread second-round effects. However, this would probably require the US and Iran to de-escalate tensions in the Middle East to ease energy markets, something that doesn’t seem imminent at the present moment.'
