What to look out for at the ECB meeting

However, it has to face the accusation of having started too late – and possibly weakening the economy even further. An interest rate break – the first since summer 2022 – will therefore be intensively discussed at the meeting of the ECB Governing Council on Thursday.

On the other hand, the persistently high price pressure justifies a further increase of 25 basis points. The key interest rate would then be 4.5 percent and the deposit interest rate for excess capital would be 4.0 percent.

In addition to the current interest rate decision, investors are also paying very close attention to whether central bank chief Christine Lagarde sends signals about the ECB’s further course in the next few months.

The central bank is also presenting new forecasts for inflation and growth developments. The most important questions:

Interest rate hike or interest rate break – the euro currency watchdogs have repeatedly emphasized in recent weeks that this decision depends solely on the relevant data. Many key indicators have been released since the last session, but a clear trend has not yet emerged.

The overall inflation rate remained surprisingly constant at 5.3 percent in August. The important core inflation, which indicates how higher prices are becoming widespread, fell slightly to 5.3 percent. Although the trend is declining, the target of two percent inflation is still a long way away.

On the economic side, the tight cycle of interest rate increases is becoming increasingly noticeable. Several forward-looking economic indicators fell short of expectations, reflecting subdued sentiment. After all, the euro area – unlike the German economy – achieved slight growth of 0.3 percent in the second quarter.

Jari Stehn, European economist at Goldman Sachs, predicts 0.6 percent growth for the euro area this year, then 1.2 percent in 2024 and an increase to 1.7 percent in 2025. He expects inflation to fall from 5.6 percent in the current year to 3.0 and 2.1 percent in the following years. He expects another interest rate move on Thursday.

Silke Tober from the union-affiliated institute IMK, however, does not expect any further interest rate increases. However, she believes that inflation will fall to 2.2 percent by 2025, very close to the ECB’s target of 2.0 percent.

What outlook does the ECB give?

There is much to suggest that the central bank will continue to pursue the data-driven approach. President Lagarde is likely to explain that all available options remain open and that even a pause in interest rates does not necessarily mean the end of the hike cycle. Only a reduction in the next few months seems to be out of the question.


When asked, Lagarde explained that there is no “central” indicator that decides the pros and cons of an interest rate move. Rather, one would classify the variables in the overall context.

The head of the ECB will probably still be asked at the press conference which indicator made the difference. From this, market participants could draw conclusions about how to proceed. Katherine Neiss, chief European economist at PGIM Fixed Income, points out that many indicators are currently negative: manufacturing and services both weakened, and warning signs are also emerging in the labor market.

What are the new forecasts?

The central bank presents its new forecasts on how growth and inflation will develop in the euro zone. The projections will only be presented parallel to the interest rate decision. But its content is likely to have a major influence on whether council members position themselves for or against an interest rate break.

The forecasts play an important role in the ECB’s monetary policy course. On the one hand, they provide information about how contractionary the interest rate hikes that have already taken place are having on the economy. And on the other hand, they provide an indication of how many measures are still necessary and to what extent the economy can tolerate them.

However, the forecasts have proven to be unreliable in the past. The ECB has regularly had to revise growth prospects downwards and inflation expectations upwards.

A particular focus is once again on core inflation. In the last forecast in June, the ECB raised its expectations for 2023 to 5.1 percent and for 2024 to 3.0 percent. The projection of overall inflation was also above the stated target level of two percent by 2025.

At this point, there is an expectation that the inflation forecast will be raised slightly again. Franck Dixmier from AllianzGI names the reason: the recent significant increase in oil prices. At least core inflation, which excludes food and energy prices, should not be affected.

Another issue could be the ECB’s total assets, which are currently falling because not all securities in the portfolio are being replaced by new purchases. However, there will probably be no change in course on this point.

More: “We shouldn’t allow ‘Made in Germany’ to be downplayed” – Bundesbank President Joachim Nagel in an interview

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