European Central Bank Interest Rate Increase

With the European Central Bank (ECB) set to increase interest rates by a quarter-point on Thursday, all eyes are on whether the central bank will maintain its hawkish tone. If so, this would suggest that another rate hike is likely to occur in September.

The ECB’s decision comes just after the U.S. Federal Reserve’s quarter-point rate hike on Wednesday, which brought rates to their highest level in 22 years. However, the Fed provided minimal guidance for future meetings.

During the ECB’s previous meeting, President Christine Lagarde indicated that the main refinancing rate for the euro zone countries would be raised from 4.0% to 4.25%.

Despite a slight decrease in inflation to 5.5% in June from 6.1% in May, both headline and core rates still surpass the ECB’s target rate of 2%.

Carsten Brzeski, head of global macro at ING Research, anticipates tough talk from the ECB during Thursday’s meeting, leaving the possibility open for another rate hike in September. However, this tough talk is not expected to include any pre-commitment as seen in June.

Recent data may temper the ECB’s hawkish stance, as a quarterly survey revealed that demand for business loans in the euro zone has reached its lowest level since 2003 when data began to be collected.

Looking ahead to the next meeting in mid-September, Jamie Dutta, an analyst at Vantage, explains that the ECB will have access to various economic data and the latest staff projections. Currently, markets view a 25 basis points hike at that meeting as a 50/50 probability.

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