Euro-area inflation stopped slowing in August, presenting European Central Bank officials with a quandary as they weigh whether pressures are too persistent to risk a pause in interest-rate hiking.
(Bloomberg) — Euro-area inflation stopped slowing in August, presenting European Central Bank officials with a quandary as they weigh whether pressures are too persistent to risk a pause in interest-rate hiking.
Consumer prices rose 5.3% from a year earlier, stuck more than 2 1/2 times above the goal sought by policymakers, because of energy. Economists had anticipated weakening. An underlying measure stripping out volatile items slowed as expected to reach exactly the same level as the headline gauge.
Traders continued to pare bets on further increases in ECB borrowing costs, focusing on the slowing of so-called core inflation, amid relief that faster-than-expected numbers from Germany and France — the region’s biggest economies — didn’t prevent an overall easing of underlying measures.
“For the market, this print is enough for a pause in September,” said Theophile Legrand, a rates strategist at Natixis SA.
The core price gauge is the most significant for ECB officials preparing to judge in two weeks’ time whether weakening growth momentum across the 20-nation bloc will sufficiently cool price pressures and ultimately deliver 2% inflation. If not, they may hike for a 10th consecutive time, bringing the deposit rate to a record 4%.
Traders are pricing in a 30% chance of such a move next month. The euro extended losses and bonds gained after the data as the end of the central bank’s tightening cycle comes into view.
Not everyone is convinced.
“The overall take is that the disinflationary process is underway, but not enough for ECB to be confident to the timely return to the 2% target in our reading,” said Piet Christiansen, chief strategist at Danske Bank A/S. “This release supports a rate hike in September in our view.”
What Bloomberg Economics Says…
“We remain confident that both measures will take a significant step down in September, but the August numbers are the last ones that will be seen by the ECB ahead of its next meeting on Sept. 14. We think the data keep the case for a rate hike on the table.”
—Maeva Cousin, senior euro-area economist. For full react, click here
The quandary for officials was articulated earlier on Thursday by ECB Executive Board member Isabel Schnabel, in remarks that appeared to chime with comments by her Finnish colleague, Tuomas Valimaki, who said earlier in the week that the outcome is “totally open.”
“Should we judge that the policy stance is inconsistent with a timely return of inflation to our 2% target, a further increase in interest rates would be warranted,” Schnabel said. “Should our assessment of the transmission of monetary policy suggest that the pace of disinflation is proceeding as desired, we may afford to wait until our next meeting to gather more evidence.”
President Christine Lagarde herself has avoided a clear statement of intent, while some of her more hawkish members have already signaled a preference for another quarter-point step.
Germany’s Joachim Nagel said in a Bloomberg TV interview last week that he’s not yet convinced that inflation is under control, while Latvia’s Martins Kazaks argued it’s better to err on the side of tighter policy. Austria’s Robert Holzmann told a Reuters event on Thursday that “another hike or two” is possible.
The euro-zone data, along with a report on Wednesday showing a pickup in expectations, might be evidence supporting their case. Stronger-than-expected consumer-price pressures in Germany and France — once again driven by energy — and a pickup in Spain, cohere to that theme.
A slight hint of encouragement for policymakers was evidence of slowing services inflation in the overall regional numbers. That’s now at 5.5%, down from 5.6% in July. Italy’s consumer-price growth also slowed more than anticipated to 5.5%.
Dovish officials — such as Portugal’s Mario Centeno — are likely to emphasize risks to the economic outlook that are starting to materialize.
Confidence is deteriorating quickly, and the latest survey of purchasing managers showed a manufacturing slump deepening with services shrinking as well for the first time this year. A sentiment survey by the European Commission released on Wednesday showed worsening for a fourth month.
A prevailing worry is malaise in China’s economy, which is hurting export prospects across the continent. Trade already weighed on output in Germany, the motor of the euro region, in the three months through June.
Hamburg’s port saw a steep decline in shipping volumes during that quarter and predicts a “significant decrease” in revenue at its Port Logistics subgroup.
Schnabel acknowledged the risks, saying that recent developments “point to growth prospects being weaker than foreseen in the baseline scenario,” while cautioning that “there are indications that the euro area economy may not be on the brink of a deep or prolonged recession.”
Inflation is also worrying her however, sharpening the dilemma for policymakers this month.
“Underlying price pressures remain stubbornly high, with domestic factors now being the main drivers of inflation in the euro area,” she said.
The main final piece in the picture for ECB officials is the institution’s staff projections, which will be ready by the time governors travel to Frankfurt for their Sept. 13-14 meeting.
The last round in June showed inflation above the 2% target through 2025, with underlying price pressures stronger than those including food and energy.
Those forecasts will be a key component for the ECB decision.
“We expect the ECB to hike one last time in September as staff projections are likely to still show inflation above target, but also for risk management purposes and because the window is closing,” said Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management. “This is also the main message from Schnabel’s speech today, if only because the fall in real rates has partly offset the ECB’s tightening.”
–With assistance from Joel Rinneby, Barbara Sladkowska, Constantine Courcoulas and Marton Eder.
(Updates with Bloomberg Economics after eighth, Holzmann in 12th, Ducrozet in final paragraph.)
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