The European Central Bank’s decision is a cliffhanger for investors, but even participants in the meeting have no inkling of the likely outcome, according to people familiar with the matter.
(Bloomberg) — The European Central Bank’s decision is a cliffhanger for investors, but even participants in the meeting have no inkling of the likely outcome, according to people familiar with the matter.
The judgment on whether to deliver another blow against inflation by raising interest rates this week or to enact a pause because of the weakening economy is so finely balanced that officials going to the gathering starting Wednesday are in suspense too, the people said.
They described an intellectual showdown set to take place in Frankfurt during the next two days where both sides of the argument have ammunition to bring to the debate, including conflicting signals in the latest economic data and new projections.
A spokesperson for the ECB declined to comment on the Governing Council’s decision.
Economists are almost evenly split on the outcome. Markets largely reflect that sentiment too, pricing a 45% chance of a hike to 4%.
That’s up from 30% seen a week ago, when Dutch Governor Klaas Knot told Bloomberg that investors were “maybe” underestimating the likelihood of an increase in borrowing costs.
If the ECB does take a break, that would represent the first time that a dovish push on the Governing Council has altogether stopped momentum for a hike since the cycle of increases began in July last year.
Data supporting a pause would include mounting evidence of a slowdown taking hold across the region’s economy. The industrial downturn gripping Germany, usually the motor of the region, has probably pushed it back into a contraction during the current quarter, according to forecasters.
Given that growth backdrop, doves are likely to argue for waiting for more evidence on whether the slowdown and tightening will bring down inflation fast enough. They can also point to the likelihood that core consumer-price growth, stripping out volatile elements such as energy, has already peaked.
Hawks will counter that both the headline and underlying gauges of inflation are still stuck above 5%, and oil and gas costs have recently risen, raising the risk of further pressure. Expectations for consumer prices have also ticked up recently.
They could also build on the argument expounded by ECB Executive Board member Isabel Schnabel that part of the economic slowdown currently taking hold may reflect long-term shifts rather than cyclical forces such as lower demand.
The new forecasts themselves might offer something to both sides. Vice President Luis de Guindos said last month that the projections could reveal a similar inflation outlook to June, even though growth prospects have worsened.
The ECB will announce the outcome of the Governing Council decision at 2:15 p.m. in Frankfurt on Thursday, followed by a press conference half an hour later.
–With assistance from James Hirai and Constantine Courcoulas.
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