Rising Prices and Muted Growth Indicate ECB Likely to Hike in September

What the Latest Data Shows

A batch of fresh economic numbers is rolling in for the euro zone.

Germany, the region's largest economy, is predicted to see a 0.1% increase. France is expected to return to growth, Italy to stagnate, and Spain to see continued robust expansion.

The June reading was unexpectedly weak. In three of the euro zone's four biggest economies, inflation is forecast to have accelerated in July, with Italy being the only country not seeing a rise.

Policymakers Are Already Leaning Toward Another Hike

The European Central Bank already raised interest rates once in June. Now its leaders are looking at the next meeting on September 10 and signaling that they are ready to act again without a clear improvement in the inflation outlook, as indicated by sources close to the matter.

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ECB President Christine Lagarde described the economy as showing "some improvement" even amid the ongoing conflict in the Middle East, and warned that the inflation shock "has yet to play out."

Martin Kocher, Austria's central bank governor, told Bloomberg Television, "We are in a position that allows us to see whether the incoming data of the next couple of weeks - PMI data, inflation data, and other data - that this data points to the direction of a hike or a hold."

Lithuanian central bank Governor Gediminas Simkus was more direct. Speaking to LRT radio, he said, "The probability that interest rates will increase is much higher than that they will not. I stand by that."

The next few weeks of data will be critical. Policymakers have made it clear they are watching the numbers closely. With a seven-week break until their September 10 decision, they will have additional sets of fresh inflation figures to examine before settling on a final stance.

Broader Economic Context

The ECB has been tightening monetary policy for over a year to combat inflation that peaked above 10% in late 2022. While price pressures have eased considerably since then, the recent uptick in July's expected reading suggests the battle is not yet over. Meanwhile, the euro zone economy has struggled with high energy costs and weak industrial output, though the modest GDP growth projected for the second quarter represents a pickup after stagnation.

Policymakers must balance the risk of choking off growth against the need to bring inflation down to the 2% target. The upcoming data releases on inflation and business activity will therefore be crucial in determining whether another rate hike is warranted.

Since June 2023, the ECB has raised its key deposit rate by over 400 basis points to a multi-year high. The potential September move reflects the central bank's determination to stamp out persistent price pressures, even as the bloc's recovery remains fragile. Geopolitical tensions in the Middle East further complicate the outlook by threatening energy costs and supply chains.

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