abrdn: Focus ECB still on inflation

abrdn: Focus ECB still on inflation

24 juli 2023

ECB
ECB Europees Centrale Bank.jpg

Felix Feather, Quantitative Economic Analyst at abrdn, comments on this week's ECB meeting.

A 25 basis point hike from the ECB next week is almost locked in, as officials have undoubtedly expressed since the Governing Council’s last meeting in June.

However, it is becoming increasingly clear that interest rates are fast nearing their peak. The communication that surrounds next week’s policy decision will provide us with more information as to how near the end of the hiking cycle is. Indeed, next week’s hike could well prove to be the last.

We don’t think the ECB is likely to commit either way regarding its decision at its September meeting at this stage. Speakers have stressed the openness and data-dependence of this decision in recent weeks, and investors will need to closely monitor the data flow and compare it to the ECB’s forecasts should they wish to anticipate it.

Policy makers are likely to look through the recent increase in the core inflation rate, which was driven by base effects associated with last year’s introduction of new public transport subsidies in Germany, and changes to the weights in the basket of goods and services used to calculate inflation.

However, strong wage growth putting upward pressure on services prices remains a concern. The ECB will be looking for the lagged effects of past tightening to overcome a tight labour market and force a moderation in underlying inflationary pressures before long.

Recent revisions to GDP data mean the “winter recession” no longer qualifies as such. The knock-on effect of this change might marginally improve expectations of GDP numbers over this year.

However, recent survey data has not been so positive, and the composite PMI slipping into contractionary territory serves as a reminder that recession risks remain. And there is building evidence of the lagged impact of earlier policy tightening weighing on credit growth and investment. However, the Council will remain firmly focussed on the current inflation overshoot for now.

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