Ahead of the upcoming monetary policy meeting of the European Central Bank, indications in the financial markets point towards a temporary pause. According to Deutsche Apotheker- und Ärztebank, the central bank will keep key interest rates unchanged on Thursday. However, according to market observers, this pause does not necessarily signal the definitive conclusion of the current tightening cycle.
In his baseline scenario, Björn Ohl, economist at apoBank, assumes that following the current interest rate pause, the rate setters will decide on a further step of 25 basis points in December. With such an adjustment, the rate-hiking cycle would be completed for the time being according to this forecast. Similar restraint is currently evident in the global context: at the Federal Reserve in the United States and at the Bank of Japan, signals point to a temporary pause following the increases in September.
Complex mix of energy prices and economic data
The upcoming interest rate decision requires a demanding balancing act from the ECB Governing Council. On the one hand, energy prices in cash and futures markets have risen again since the previous meeting. At the same time, the broader economy of the euro area is proving remarkably resilient, even though preliminary purchasing managers' indices for October came in weaker. This combination of persistent inflationary pressure and stable underlying economic activity fundamentally provides arguments for continuing interest rate rises.
Arguing against an immediate hike at the current meeting, however, are the noticeably higher yields on European government bonds. In France in particular, refinancing on the capital market has become significantly more expensive. These tighter financing conditions exert a dampening effect similar to monetary policy tightening, thereby reducing the immediate pressure on the central bank's council to take action in the short term.
Focus on central bank communication and outlook
- —Unchanged key interest rates are expected for the upcoming meeting on Thursday.
- —An interest rate move of 25 basis points in December is considered apoBank's baseline scenario.
- —Increased yields on French government bonds dampen the necessity for further rate hikes in the short term.
- —A sustained rise in energy prices could justify an additional need for action in the first quarter of the following year.
Should monetary policy rates remain stable on Thursday as expected, the attention of financial markets will focus primarily on the accompanying communication. Both the written Monetary Policy Statement and the remarks made during the official press conference will be decisive. It is considered likely that recent yield spreads of individual euro area countries, particularly developments in France, will be addressed.
apoBank does not expect any firm pre-commitment for the December meeting. Nevertheless, according to the bank, upside risks to the price level continue to prevail. If climbing energy prices create additional inflationary pressure in the coming months, a further key rate rise in March of the following year would also be conceivable in a secondary scenario.
