Julian Marx (Flossbach von Storch) | Strength lies in calm, and this applies to monetary policy as well. As a rule, the European Central Bank (ECB) avoids generating unnecessary suspense before potential changes in interest rates. This occasion was no different: Bundesbank President Joachim Nagel virtually previewed the rate decision when speaking to the French newspaper Le Monde in early September:
“Inflation is currently very far from our medium-term target […]. According to the June forecasts, it will only return to 2% in the medium term under the assumption of higher interest rates. Consequently, markets are pricing in a higher than 95% probability that we will raise rates at our September meeting. I would say markets now have a fairly clear idea of our monetary policy response.”
True to its word, the ECB responded to persistent high inflation at its latest monetary policy meeting with a second rate hike this year, raising the deposit facility rate from 2.25% to 2.5%.
For six months, eurozone inflation has remained around 3%. In August, it even reached 3.3%. As is well known, the timing of these high inflation rates traces back to the US attacks against Iran and the resulting supply constraints on fossil fuels. In this context, it comes as no surprise that energy prices rose 14% year-on-year in August and have continued to be the main driver behind recent price developments.
From a monetary policy standpoint, several conclusions can be drawn. On a brighter note, the recent surge in energy prices remains well below the levels seen in 2022: following the outbreak of the war in Ukraine, energy prices surged at times by more than 40% year-on-year. While inflation concerns are fully justified, this at least helps downplay the severity of the current situation.
There is also some cause for optimism in the fact that eurozone growth was slightly higher than expected in the second quarter. Despite geopolitical uncertainties and persistently high oil prices, the domestic economy is proving somewhat more resilient than anticipated. This is confirmed by the latest forecasts from ECB experts, who now expect eurozone growth of 0.9% this year, up from the 0.8% projected in June. Consequently, the modest pace of growth continues to give the ECB some leeway on interest rates—margin it chose to use at its latest monetary policy meeting.
