Exclusive: ECB Insider: Probability of Another Rate Hike Maybe a Bit Less Than 50%

25 September 2023

By David Barwick – FRANKFURT (Econostream) – The likelihood that the European Central Bank will or won’t need to hike again is probably closer to being balanced than markets realise, in the view of a Eurosystem insider who spoke to Econostream recently.

‘It's absolutely clear we have made a significant move to the peak, but we may or may not be at the peak’, this person said. The probability of no further hike is ‘maybe a 50 plus. But that means [odds of] 50 minus for a hike.’

If there were to be another increase in official interest rates, ‘it will be in December at the earliest’, unless data available at the October meeting were ‘very bad’, he said. ‘So basically, it's December where the topic will be on the table again: hiking or not hiking.’

The appropriateness of the 14 December Governing Council meeting for raising the question of a potential need to hike yet again had to do with the significant new information available then, he observed.

Not only would there be new macroeconomic projections of the Eurosystem – ‘not just of the staff’, he said – but, significantly, the forecast horizon would encompass 2026 for the first time.

The 2026 projections were ‘quite important’, he said. ‘Either they confirm that we’re on the road to price stability or they don’t.’

‘So, suppose the projections for ‘26 would be 1.8% or something like that’, he said. ‘In that case, okay. But if they would increase in relation to the current one for ’25, there would be a discussion about how to react, for sure.’

With uncertainty so high, including with respect to the question of whether the ECB had reached the peak, it would have made little sense for the Governing Council to consider now or on 14 September any timeline for potential easing, he said.

Asked when it could make sense for the Governing Council to start discussing this, even if only in very general terms, this person replied, ‘Not before December. But other people might say differently.’

Even if HICP were seen at 2% or less in 2026, stoking market speculation about monetary easing, the ECB might well remain wary for a while about indicating that any loosening of the reins was forthcoming, he said.

‘Maybe there would be a totally new situation where we have to increase again’, he said. ‘Who knows? In this uncertainty, you cannot exclude it.’

For this reason, he said, predicting the date of the first cut amounted to a ‘guessing game’ for now that the ECB has justifiably not engaged in internally either.

‘If someone comes and says, “I think that the first cut will be before the end of the first quarter”, I would say, “Based on what?” he said. ‘On his personal opinion, and what he really wants for different reasons. Or if someone would say, “I think the first cut cannot come before the second quarter”, I would also say, “So, where does he get this from?”’

Still, if the ECB decided that it could afford to cut unexpectedly soon, then policymakers should not be dissuaded by the thought that this could make the September rate hike appear to have been a miscalculation, he said.

‘You can still consider that this move was necessary and that it had an impact that will bring us more quickly to our objective, so that we then can cut rather sooner than later’, he said. ‘It can be seen as confirming what we did.’