A 25 basis point interest rate increase at Thursday's meeting of the European Central Bank (ECB) in Frankfurt is considered a "done deal" by analysts. Oxford Economics highlights that the ECB's limited communication during the summer did not contradict this expectation, and the recent rise in energy prices sealed the agreement. The price of Brent crude rose above 100 dollars per barrel for the first time since July, due to the escalation of the Middle East conflict between the US, Israel and Iran. A Reuters poll of 65 economists points to the Deposit Facility rate rising to 2.50% and the refinancing and marginal lending facility rates to 2.65% and 2.90%, respectively.
The Frankfurt meeting also includes the release of new ECB economic projections, which are expected to be revised upwards for inflation due to higher energy price assumptions. Banco BPI analysts warn that the prolonging of the conflict and high energy inflation increase two key risks: the spread of prices to other goods and services and a persistent rise in inflation expectations. Eurozone inflation accelerated to 3.3% in August, once again in line with the central bank's forecasts.
The big question is whether the ECB will stop here or leave the door open for another increase by the end of the year. Oxford Economics analysts expect a unanimous decision in September but acknowledge divergences among Governing Council members. Isabel Schnabel categorically stated that rates must rise further, while Piero Cipollone warned that aggressive increases could harm economic growth. Joachim Nagel validated expectations for September but remained cautious about the future.
There is a divergence between economists and investors on the next steps. In the Reuters poll, 91% of economists expect the deposit rate to remain at 2.50% until the end of the year, but the ECB Watch tool shows that markets are betting on a 58.1% probability of another increase in December. Ebury considers that markets have gone too far in pricing further increases, emphasizing that the inflation problem is mainly due to the supply side. For investors, attention will be focused on the clues that Christine Lagarde may give about what follows.
