For the upcoming European Central Bank meeting, Deutsche Apotheker- und Ärztebank forecasts that current key interest rate levels will temporarily be maintained. According to Björn Ohl, economist at the institution, this pause is nevertheless unlikely to mark the final end of the rate hike cycle. Instead, the bank's primary base scenario anticipates a final rate step of 25 basis points in December, which should bring the tighter monetary policy phase to its provisional conclusion.
A comparable approach is currently emerging in a global context. Both at the US Federal Reserve and the Bank of Japan, signals following the September rate increases point to an interruption in interest rate adjustments. For the central bankers in Frankfurt, the forthcoming assessment of the situation nevertheless proves challenging, as conflicting macroeconomic signals converge.
Influencing factors between inflation and capital market yields
On the one hand, energy prices on spot and futures markets have registered continuous increases since the previous central bank meeting. At the same time, the economy across the entire Eurozone has so far shown remarkable resilience, although provisional purchasing managers' indices for October indicated weaker trends. This combination of persistent price pressure and economic stability generally argues in favour of continued monetary dampening.
Arguing against an immediate increase as early as October are the noticeably higher yields on European government bonds, with French paper in particular recording marked spreads. This tightening of general financing conditions already acts like additional monetary tightening in the market. From the central bankers' perspective, it reduces the necessity of adjusting official policy levers straight away.
Significance of central bank communication and outlook
- —Unchanged key interest rate level in October with a likely 25 basis point hike in December
- —Dampening effect from rising government bond yields, particularly in France
- —Persistent upside risks to inflation as a result of volatile energy prices
- —Potential extension of the rate cycle into March should inflationary pressure persist
Should the rate decision turn out as predicted, the verbal framing provided by the ECB will carry particular weight. Relevant factors include both the written Monetary Policy Statement and the remarks delivered during the official press conference, where the increased yield spreads of individual Eurozone countries are likely to be addressed. While a definitive commitment regarding the December decision is not expected by apoBank, upside risks to inflation trends remain predominant in its view.
Should renewed price increases in energy commodities cause additional inflationary pressure in the coming months, an alternative scenario would, according to the economist, not even rule out a further rate increase in March.
