European Central Bank: Balancing Inflation and Growth Outlook

European Central Bank

The message from the ECB since the June meeting has been clear: the job is still not done and more rate hikes will follow.

Despite a weakening growth outlook and headline inflation coming down, the ECB doesn’t want to take any chances. The Bank has to be sure that it has slayed the inflation dragon before considering a policy change. This is why it is putting more emphasis on actual inflation developments, and why it will rely less on forecasts than in the past. This is a big risk as we still think the ECB is too optimistic about the eurozone’s growth outlook. Historic evidence suggests that core inflation normally lags headline inflation while services inflation lags that of goods. Against this backdrop, further rate hikes increase the risk of a more significant slowing of the economy further down the road.

If we are right and the economy remains weak, the disinflationary process gains momentum and core inflation starts to drop after the summer, the ECB’s hiking cycle should end with the September meeting, though the Bank might wait until the December meeting to officially declare it over.