Remember that next week\u2019s meeting will not come with new macro projections. Still, expect the ECB to have at least run an internal update of where the June projections currently stand, taking the latest oil price developments into account. With current energy prices, we are right back at the ECB\u2019s base case scenario from June. This is a scenario that was built on market assumptions: a total of at least two rate hikes, headline inflation gradually coming down over the course of 2027, and core inflation remaining slightly above 2% for the entire forecast horizon.<\/p>\n
Surprisingly slow inflation data in June and very little sign of indirect or even second-round effects should have taken away the urge to hike policy rates further. Still, the ECB\u2019s base case scenario will be a clear argument in favour of yet another rate hike. And not only in the base case scenario. The entire discussion about the \u2018insurance rate hike\u2019 actually also favours a second hike. Why? Well, if the ECB sticks to a \u2018one and done\u2019 hike, it could eventually be seen as a \u2018panic hike\u2019, inviting criticism that the ECB jumped the gun. A second rate hike could, of course, worsen a policy mistake. But, following the ECB\u2019s own logic, it would strengthen the narrative that such a hike is required to reach the base-case inflation scenario. Remember that monetary policy is not only a science but also an art, and, to an increasing degree, communication and psychology.<\/p>\n
Until early last week, we would have argued that lower energy prices took the rate hike option entirely off the table for the ECB\u2019s July meeting. But some members might feel tempted to use the latest resurgence in energy prices as a reason to get things done as quickly as possible, potentially even as soon as next week. While the ECB doesn\u2019t have a recent track record of surprising markets, hiking rates next week would simply get the job done. Also, at least for the hawks, there remains a risk that any relief in oil markets ahead of the September meeting could mechanically lower inflation forecasts, removing the justification for a second rate hike.<\/p>\n
All in all, there remains a small chance that the ECB will hike next week. The more realistic scenario, however, is a hike at the September meeting. In any case, instead of a summer lull, next week\u2019s meeting promises one last clash between the hawks and doves before anyone reaches for the sunscreen. The towels may already be laid out, but for the ECB, the beach break will have to wait.<\/p>\n","protected":false},"excerpt":{"rendered":"Remember that next week\u2019s meeting will not come with new macro projections. Still, expect the ECB to have…\n","protected":false},"author":2,"featured_media":713157,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[64,63,99,164],"class_list":["post-803310","post","type-post","status-publish","format-standard","has-post-thumbnail","category-economy","tag-au","tag-australia","tag-business","tag-economy"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/803310","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/comments?post=803310"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/803310\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media\/713157"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media?parent=803310"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/categories?post=803310"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/tags?post=803310"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}